Salient to Investors:

Charlene Chu at Fitch Ratings says:

  • Total lending from banks et al in China was 198 percent of GDP in 2012 versus 125 percent 4 years earlier, and there is just no way to grow out of a debt problem when credit is already twice as large as GDP and growing nearly twice as fast.
  • How long can China maintain growth driven by bank lending that has allowed it to sidestep the global financial crisis?
  • The assets of Chinese banks may increase by as much as 20 trillion yuan in 2013, exceeding the $13.4 trillion of assets held by US commercial banks at the end of 2012.
  • Companies’ ability to pay back what they owe is wearing away, as China gets less economic growth for every yuan of lending.
  • The China Banking Regulatory Commission reports the ratio of non-performing loans declined to 0.96 percent as of March 31 from 2.42 percent at the end of 2008, but these figures are distorted. The ratio has declined mainly because credit has surged, and the regulator’s data does not reflect the real amount of debt because of the ways banks move loans off their books. Some loans, often for real estate, are bundled and sold to savers as wealth-management products, while other assets are sold to non-bank financial institutions, including trusts, to lower the lenders’ bad debt levels. Banks have substantial off-balance-sheet positions for which there is no asset-quality information.
  • Regulatory loopholes and weaknesses in China’s banking system make official lending data unreliable.
  • China’s total credit was 198 percent of GDP in 2012 when adding off-balance-sheet assets. A jump in the ratio is usually one of the most reliable predictors for a financial crisis.
  • Companies are taking on a lot of debt but not getting comparable returns, so at some point they will have problems repaying the debt.

Fitch said the ratio of credit to GDP in China has increased 73 percent in 4 years – a 45 percent jump in the ratio from 1985 to 1990 preceded a banking crisis in Japan, and a jump of 47 percent from 1994 to 1998 preceded a banking crisis in South Korea.

Chinese banks are adding assets at the rate of an entire US banking system in 5 years.

Michael Werner at Sanford C. Bernstein said only 29 percent of aggregate financing in 2012 translated into economic growth, the lowest rate on record, as borrowers use more resources to finance outstanding debt and less for investment.

Stephen Green at Standard Chartered said everyone is talking about the credit cycle, leverage and credit-quality problems, but there is not enough good data, just a scary big black box.

Francis Cheung at CLSA Asia-Pacific Markets estimates total corporate, household and government debt at 205 percent of GDP, versus less than 250 percent in the US and almost 400 percent in Japan.

Liu Li-Gang at ANZ said China’s ratio of debt to GDP is lower than in any developed Western economy, and Chu’s alarm does not take into account the enormous assets held by the government when assessing the ability to repay debt. China’s four largest banks, all majority-owned by the government, controlled 43 percent of the nation’s 134 trillion yuan of banking assets at the end of 2012.

China faced a banking crisis in the late 1990s. The state banks were transformed from almost insolvent institutions to the world’s most-profitable lenders with the help of more than $650 billion in bailouts.

Liao Qiang at S&P said China is in a better position to tackle non-performing loans since in the past decade, China’s economy has quadrupled, the number of urban residents surpassed those on farms and policy makers allowed freer flows of its currency in and out of the country. Foreign-exchange reserves surged fivefold from 2004 to year-end 2012. Liao said China’s credit is mostly funded by its internally generated deposits, so a real financial crisis, normally manifested in a liquidity shortage, will not happen anytime soon.

Xu Gao at Everbright Securities sees no basis for concluding that China’s debt is unsustainable as a public debt level of 50 percent of GDP leaves room for the government to borrow more.

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