China’s looming debt bomb

[mota bhai 2,675]

NATHAN VANDERKLIPPE AND ERIC REGULY
BEIJING AND LONDON — The Globe and Mail
Published Saturday, May. 03 2014

Caofeidian lies a three-hour drive east of Beijing, a Chinese industrial dream jutting into the sea. A decade ago, it was a pretty coast whose shallow waters were dotted with fishing vessels. Today, it’s a manufacturer’s paradise in the making, its eight-lane roads connecting sprawling factories to a vast port. Named after a former imperial concubine, it was a place of feverish fantasy, where borrowed money fuelled a vast reclamation effort to create 200 square kilometres of land and build something new.

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Caofeidian was to be home to a million-person eco-city, a massive steel factory, a power plant, an oil refinery and a panoply of apartments, bus makers, warehouses, lumber plants, a Sino-Japanese business park, even an “exhibition centre of strategic new industries.” A decade of spending poured $100-billion into the soil here.

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But the loans that allowed all that spending have just 50 per cent odds of being paid back, says an independent research group that has spent years studying Caofeidian. The stakes are enormous. Caofeidian was a project of national importance for China, a “flagship,” according to Jon Chan Kung, chief researcher at Anbound, a Beijing think tank.

“If this project fails, it proves that the major model driving China’s development has also failed,” he says.

Debt now stands to undo at least some of what China’s spending has accomplished. Some of the country’s major projects have done little more than strand vast amounts of invested capital. Debt is just one of the ticking time bombs in China today. China must also cope with the fallout from slowing spending in a place where social stability has been largely defined by one thing: the non-stop accumulation of wealth.

“There will be a financial crisis. And I feel that the financial crisis is in the near term,” says Anne Stevenson Yang, co-founder of Beijing-based J Capital Research. “There will be a recession and then a long period of very, very slow growth. That’s my definition of collapse. I’m not talking about people running through the streets with torches. That may or may not happen.”

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China has now become an “economy that is actually worth a lot less than they pretend it’s worth,” Ms. Stevenson Yang says.

By her estimate, 60 to 70 per cent of new lending is now going to service old debt. In 2006, $1.20 in new credit could stoke $1 in economic growth. Today, it takes over $3. At that rate, it takes a greater than 20-per-cent annual expansion in credit to sustain China’s target 7.5-per-cent economic growth.

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Debt has exploded throughout the economy ... Interwoven networks of credit have developed with a byzantine level of complexity. They are underlain by a furiously competitive, and lightly regulated, shadow lending sector that has poured money into investments of vastly differing quality. Even the most cautious lenders in China, the state-owned banks that supported developments like Caofeidian, now find their portfolios strewn with rotten projects.

Much of the credit expansion is due to the explosion of shadow banking, which consists of trust companies, leasing companies, insurance firms and other types of non-bank financial institutions. Such shadow banks typically lend money to industry from capital raised from wealth management products sold via traditional banks to everyday individual investors who may not know exactly what they’re buying into or understand the risks.

http://www.theglobeandmail.com/report-on-business/chinas-looming-debt-bomb-shadow-banking-and-the-threat-to-growth/article18409275/

Edited May 4, 2014 by mota bhai

[Jacque67 7,328]

Yep.Lots of ghost towns in China, unfortunately.