T Nation

Chinese Loan Problem?


#1

Looks as if China may have an utterly huge problem with bad loans -- I've been wondering just how trustworthy their economic growth numbers are, given the nature of their government and their economy, and this makes them look highly suspect:

http://www.theaustralian.news.com.au/story/0,20867,19067992-36375,00.html

Excerpt:

[i]ESTIMATES of the growing pile of non-performing loans (NPLs) in China appear to have caught many by surprise, especially because Beijing's efforts to clean up its rickety state-owned banks were thought to have greatly reduced NPLs and the risk of a full-blown financial crisis.
According to Ernst & Young, the accounting firm, bad loans in the Chinese financial system have reached a staggering $US911 billion ($1.18 trillion), including $US225 billion in potential future NPLs in the four largest state-owned banks.

This equals 40 per cent of gross domestic product and China has already spent the equivalent of 25-30 per cent of GDP in previous bank bail-outs.[/i]


#2

BB,

You bring up a really good issue here. I've studied Chinese culture, history, and am trying to learn the language (Mandarin). These people are very subtle. Why would the Chinese communists suddenly allow capitalism to flourish in their economy? If the house of cards that you describe falls, then that'll bring chaos into our markets. The problem you point out is one that's hidden from view for most Americans. There is something going on there and I am highly suspicious, just knowing something about these people.


#3

What happens when they dump Treasuries to grab cash?


#4

I don't think they can afford to at this point because that would hurt their export market, and they will desperately need that cash influx to fix this issue.


#5

Thank you for bringing this up, BB...

I truly have no idea if and how the Chinese will deal with this problem. Yes, I said IF -- considering how well the Chinese were taught by the US, I suspect they might just take another page from our book, and ignore the problem until it eventually explodes.

That's basically what Japan did when faced with a similar predicament, and they actually came out of slump caused by the explosion by dramatically increasing the public debt (a second page taken out of our books) -- but Japan didn't hold such a large percentage of the US debt (it was actually the other way around), and Japan does have a largely highly skilled, highly paid workforce (who actually holds a good part of the public debt in the form of privately owned bonds!), contrary to China.

Great paper on Japan's situation (a good preview of the BEST CASE scenario for China in the future):

http://www.mof.go.jp/english/pp_review/ppr001/ppr001d.pdf

Basically, the fundamental problem for us here is indeed the fact that China holds so much of our debt -- because if they do decide to do what we and Japan did -- rack up the public debt -- the question is who'd buy their bonds in order to finance their debt (allowing them to do what we and Japan did)?

One possibility is for the rich Middle Eastern countries to step in and buy the Chinese bonds, but that has several problems: first, that means that we would be indirectly in their hands, second, it means that China will have a preferential treatment as a destination for oil, third, it means oil prices will go further up, fourth, it also means that whatever currency they are issued in, Chinese products will become more expensive for us.

I do think this adds credence to my previous statements that it is a very dangerous thing for us to be as dependent on China as a supplier. The uncertainty it creates is by definition very costly for us. No good outcome will result of our dependency.


#6

That is the answer I was looking for and that is all we need to worry about.


#7

From today's Nightly Business Report:

http://www.pbs.org/nbr/site/onair/transcripts/060510b/

"
Darren Gersh Examines The Complicated Financial Connection Between the U.S. & China
Wednesday, May 10, 2006

SUSIE GHARIB: The U.S. Treasury has once again given China a pass, refusing to brand it as a currency manipulator. Late today, the Bush administration released its semiannual report on exchange rates, and says there has been too little progress on reform of Chinas currency regime. American manufacturers say China has been deliberately keeping its currency devalued by as much as 40 percent against the U.S. dollar, giving the Asian nation a huge competitive advantage against U.S. products. Joining us now with more, NIGHTLY BUSINESS REPORTs Washington bureau chief Darren Gersh. Darren.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Susie, it really was very interesting. The Treasury put out a toughly worded statement, saying it was extremely dissatisfied with Chinas slow pace of currency reform. But when he came before the cameras, Treasury Secretary John Snow seemed reluctant to criticize the Chinese. He said they had embraced comprehensive currency reforms, and he sounded almost pleased with the progress so far. Finally a reporter asked him whether he was really all that dissatisfied with Chinas currency policy and this is what he said.

JOHN SNOW, TREASURY SECRETARY: .Six months and we havent seen as much progress as we wanted to see. The Chinese are being too cautious. They arent moving as fast as we think they should or could. Were critical of China. Were saying that China is in a position to do more.

GERSH: But the Treasury found no evidence China is manipulating its currency to give it an unfair trade advantage. That prompted critics on Capitol Hill to threaten once again to move on legislation slapping tariffs on China if it doesn`t raise the value of the yuan.

SEN. LINDSEY GRAHAM (R) SOUTH CAROLINA: Im convinced that you could have appreciation in the 7 to 10 percent range by the end of this year without destroying the Chinese banking system, and it would be a commitment on their part that I could use to go back to my constituents and say things are getting better. Right now, all I can tell my constituents is, Im sorry things are not getting better. Im running out of excuses to explain why theyre not.

GERSH: The Treasury is trying to balance tough talk with the kind of diplomacy it believes will get results with the Chinese. But at the same time, analysts say the Bush administration could lose its credibility on this issue.

MORRIS GOLDSTEIN, INSTITUTE FOR INTERNATIONAL ECONOMICS: Weve had very little progress both over the last year, over the past three years, and yet Treasury hasnt been able to pull the trigger. So I would characterize the Treasury policy on this as whine and whine, huff and puff and decline.

GERSH: Congressional critics of Chinas currency reforms say if the country takes no action by the end of September, theyll push for a vote on a bill that could raise tariffs about 27 percent and that would set up an election-year showdown on the issue. Susie?

GHARIB: So Darren, do you think that the Bush administration really is risking its credibility on this whole China currency issue?

GERSH: Its a really good question. The Bush administration is trying to walk a thin line between criticizing China, which they dont take very well to, and also addressing the political concerns people have that the administration isnt tough enough on China. The Chinese have moved a bit. Theyve raised the value of the yuan about 3 percent. It`s not enough for congressional critics.

GHARIB: So then do you think it`s just a matter of time that China will do the right thing about its currency or does it have to be pressured to revalue?

GERSH: You know, the Chinese have shown that really they dont like pressure and they will do things when it is in their interest to do them. Its interesting. Nicholas Larty at the Institute for International Economics was also pointing out recently to me that we dont have a lot of leverage with the Chinese right now. We have a very inter-dependent relationship. We buy a lot of goods from them. They make a lot of our high-tech goods. Also we need the Chinese. We want them to help us with the Iranian situation, so its very complicated relationship. But the Chinese usually like to do what they like to do when they like to do it.

GHARIB: It is a complicated issue. Darren, thank you very much for your report. Darren Gersh reporting from Washington.
"


#8

If we didn't have already enough material to disassociate ourselves from China, it just keeps pilling up -- and there's no real sign of improvement.

From http://www.dailytech.com/article.aspx?newsid=2272

"
A Chinese government friendly Wikipedia modeled encyclopedia

China's government has always been keen to block content they deem threatening. Sites such as Wikipedia have been banned by the Chinese government for references to the Tiananmen Square Massacres, Taiwanese independence, etc... This leaves Chinese citizens who wish to look up legitimate unblocked information at a loss. About a month ago a Chinese citizen, Robin Li, launched an encyclopedia modeled after Wikipedia?the Baidupedia. Baidu is already a popular search engine in China.

"Baidu has barred users from including any "malicious evaluation of the current national system", any "attack on government institutions" or "promotion of a dispirited or negative view of life",
according to the paper."

The Baidupedia will allow users to look up information as long as it's not on a subject the Chinese government is touchy on.
"


#9

I am going to second hspder and headhunter here. The Chinese scare the shit out of me.

It would not suprise me if in fact they do recieve 'most favored nation' status from Middle East countries in order to get a lower price on oil and its distillates. They might count on the various Kingdoms willingness to support a 'bad financial system' in exchange for the potential return later. The 'what's in it for me' for the Middle East would be the investment. Granted it would be risky and conservative governments tend to be risk avoiders, but in this case they see themselves allied and aligned against the 'Great Hegemonist'.

It would be the Middle East's way of retaliating for the creation of so much instability. The Middle East is currently producing at max, but the flow can easily be diverted to support an investment. It could be an instance of politics dominating the economics of the situation.


#10

As far as it goes, they're going to get "MFN" from the equitorial African countries far sooner than from the Middle East -- if you want to know why we aren't doing more on Darfur and the Congo, look t to the Security Counsel and Beijing.


#11

Looking at it from the Chinese perspective, it would make sense. It would keep the US away from their doorstep, an old Chinese political tactic.

If you have an enemy that is stronger than you are, form relationships with others that could potentially threaten him, but do it in a fashion that keeps him away from your doorstep. And keep him occupied out there for a while.

In the mid 1970's, an Australian reporter wrote a book about chinese politics. He traced the history of how they manipulated, cajoled, or out right attacked in order to maintain their independence and freedom. They only failed with the Manchu's who were not traditional chinese, but outsiders in a manner of speaking.

It was riled in the academic press, but his points were well taken and his predictions have been born out. I have forgotten the title and the author, but give me some time and I will dig it out. It made for interesting reading while I was living there.

His take was, in essence, that even the communists would not really deviate from the traditional way of handling foreigners and diplomacy. China will always work towards making China the center of the world politically, economically and socially to the point of demanding tribute...


#12

Not completely related, but it is nevertheless interesting...

"
Fraudulent Reseach Leads To High Profile Firing Of Chinese Professor
Samad Khan - May 15, 2006 10:59 AM


A dean from one of China's top Universities has been fired after his claims of inventing a new computer chip technology turned out to be fraud

Shanghai Jiao Tong University fired Chen Jin after finding out that he faked research on the Hanxin digital signal processing chip. It was also discovered that the chip was unable to perform functions claimed by Chen earlier like verifying fingerprints. The University stated that later versions of the chip did not perform functions as earlier claimed either.

The University started an investigation into Chen?s work after receiving a letter that alleged fraudulent research. An investigation by the University claimed that Chen deceived technological appraisal teams from the central and local governments and also the university and government ministries that funded his research.

This case bears similarities to the South Korean Cloning scientist who announced huge advances in Stem Cell research that gave hope for breakthrough treatments to diseases such as Alzheimer's, until investigations late last year showed that he had fabricated key data.
"