Sunday, January 24, 2010

NYT: Economic Stimulus a Mixed Bag for China

Stories are starting to hit the mainstream media that echo what we were highlighting a year ago as everyone celebrated the Chinese stimulus package.  , [Feb 16 2009: Is China Pulling an Alan Greenspan?] [May 27, 2009: How is China Spending Their Stimulus? ... and How Many Loans will go Bad?]  Another example (back then) of benefit-benefit analysis... as long as some action makes the stock market go up (and solves the problem 6 inches ahead of our nose), we are content to only deal with the positives!  As for the costs, frankly we'll never know the true scope of damage done because of lack of transparency... but based on how many misallocations of capital have happened in the US the past decade, we can expect the same in China.  We are already seeing some of the costs - subsidized land and stock prices.  And surely they've overbuilt some industries as well....

  1. [Dec 31, 2009: BW - China Property Bubble May Lead to US Style Real Estate Slump]
  2. [Aug 13, 2009: WSJ - In China, Land Prices Fan Bubble Fears]
  3. [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market]
  4. [Aug 26, 2009: China Studies Curbs in Steel, Cement]

On the plus side, they did not have to go into debt to do this action, and were more than happy to use the money we send them each and every day.   And to give the Chinese credit their stimulus projects seemed to have 50x the effect ours did.  Their hybrid "central command capitalist" model does do a good job of disbursing monies quickly, if not efficiently.

If you didn't catch it earlier in the week, China told some of its larger banks to stop all lending until the end of the month.  As a global speculator audience who is now trained on easy money, any such moves cause serious unease.  Talk is now starting of when the Chinese central bank will begin to raise rates...

Via NYT:
  • Despite U.S. government prodding and wheedling and unprecedented taxpayer-financed bailouts, American banks have stuck to anemic lending policies over the past year, seeming more concerned with replenishing their bonus pools and reserves than helping to rekindle the economy.  As is often the case, things have played out differently in China.
  • Like other besieged governments, Beijing responded to the financial crisis in late 2008 with a major fiscal stimulus of 4 trillion renminbi, or $586 billion, over two years. Unlike many other governments, Beijing could also order — not just ask — Chinese banks to mount a parallel stimulus offensive in the form of a huge lending drive.  Fresh lending by Chinese banks in 2009 rose to nearly 10 trillion renminbi, about double the volume of the previous year.
  • While this has helped China to weather the economic storm in flamboyant style so far, it may yet prove costly. Not only does the government fear the inflationary potential of its stimulus measures, but there are also risks of destabilizing asset bubbles, industrial overcapacity and waste from duplicative investment projects.
  • For the banks themselves, the lending splurge threatens to undo significant progress made in recent years in reducing ratios of problem loans to total lending.  A decade ago, Chinese banks staggered under a load of bad debt, reported by the Bank of China at nearly 40 percent of their total lending in 1999. In 2000, the nonperforming loan rate for the major commercial banks in China stood at 29 percent, according to official statistics and in the view of many Western analysts who questioned Chinese accounting standards, it was probably far higher. Nonperforming loans are defined as those on which repayments are more than three months in arrears. 
  • The government vowed to bring the rate down to 15 percent by 2005, and by the end of 2007 it had dropped below 7 percent. One factor behind this reduction was the need for Chinese banks to attract investment from private and foreign sources.  This steep decline to single-digit levels would seem to tell a heroic tale of a banking system that solved its problems, but not all analysts take it at face value. Skeptics say the cleanup was largely based on sleight of hand, involving specially established asset management companies, speculative bonds and fuzzy government guarantees that together did little more than kick the problem down the road.  (apparently kicking the can is a global sport)
  • Even the least cynical analysts acknowledged that lower ratios partially reflected the dilution of bad loans in a vast sea of new lending, some of which would go bad but was still too recent to register as nonperforming.
  • Yet such doubts and qualifications notwithstanding, few deny that some degree of bad debt reduction was genuine and that overall loan quality among Chinese banks has improved from the worst of times.

That was then... we're more concerned about "now" and "future" - especially for a country in which it seems every stock market in the world is dependent on as a source of strength.  I thought this would be an issue for 2011-2012 but as with all things, it can begin to "matter" whenever the masses acknowledge the issue.... i.e. Greece did not go away but for a month now we have swept it under a rug.
  • Now, however, new concerns are emerging over the state of Chinese banks and their balance sheets. Zhou Xiaochuan, governor of the People’s Bank of China, the country’s central bank, spoke publicly of such worries in early January, and hinted at a lending slowdown.  Large credit flows, “will not only go against the objective of economic structural adjustment, but will also pose bank lending quality risks,” Mr. Zhou said in a magazine interview.
  • Mr. Zhou’s comments also included a mention of bank reserve ratio requirements as a policy tool, and on Jan. 12, the central bank duly announced an increase of 0.5 percentage point, to 16 percent, in the proportion of their deposits that Chinese banks must keep on reserve.
  • The increase was the first reserve ratio adjustment in China in about 14 months. Many analysts predict that total Chinese bank lending may pull back by about 20 percent, to no more than 8 trillion renminbi, this year.
  • According to Jing Ulrich, managing director of China equities in Hong Kong for JPMorgan, the first half of 2010 will experience continued but gradual policy tightening, with more emphasis on further administrative measures, rather than interest rate adjustments.
  • Ms. Ulrich also warned that the longstanding Chinese aim of lifting domestic consumption “has gained new urgency in the face of last year’s collapse in external demand.” She said that she expected the authorities to continue the consumption stimulus policies they adopted in 2009. These included encouragement for consumer finance companies, subsidies for private car owners who sell old vehicles to buy newer ones, and similar aid for large household appliances.
  • It is “almost inevitable” Mr. Pettis said, that the recent credit splurge would lead to more nonperforming loans, or NPLs, and the burden of recapitalizing banks might ultimately fall on households. Because substantial stakes in many Chinese banks are now held by private and foreign investors, the government may be reluctant either to give cash directly to banks or to buy their bad loans above true value. That, he said, left the option of giving banks a de facto subsidy by setting a wide spread between the rates they pay on deposits and the rates they charge for lending.  “Households are effectively being taxed with low interest rates on their deposits,” Mr Pettis said. (i.e. what is happening in the U.S. as the Fed strangles short term rates right near "zilch")

As the stock market whistles its way to nirvana (don't mind the graveyard), keep items like this on your radar.  They are out there - they will eventually matter - but you never know when a herd of bulls will take a moment to sniff the air for danger.  When they do, they tend to panic... but until then, they graze in ambivalence.  As we love to say "it doesn't matter... until it matters."

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