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China’s Credit Bubble Unprecedented

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Whereas China may have helped to save the world in 2008, its ability to help global GDP has slowly been strangled by its own massive debt levels. Corporate and private sector debt has grown out of all proportions severely limiting China’s ability to grow its way out of its debt problems.  It’s not just Western banks we need worry about.

China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.

“The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation,” said Charlene Chu, the agency’s senior director in Beijing.

“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling,” she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.

Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion segment of the shadow banking system.

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term “Shibor” borrowing rates, a sign that liquidity has suddenly dried up. “Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products,” she said.

Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a “massive savings account that can be drawn down” in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis.

“They have replicated the entire US commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

The agency downgraded China‘s long-term currency rating to AA- debt in April but still thinks the government can handle any banking crisis, however bad. “The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk,” said Mrs Chu.

“There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can’t grow out of that.”

The authorities have been trying to manage a soft-landing, deploying loan curbs and a high reserve ratio requirement (RRR) for banks to halt property speculation. The home price to income ratio has reached 16 to 18 in many cities, shutting workers out of the market. Shadow banking has plugged the gap for much of the last two years.

However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion.

Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises — and many will not be able to pay interest or repay principal. She warned that the country could be on the verge of a “Minsky Moment”, when the debt pyramid collapses under its own weight. “The debt snowball is getting bigger and bigger, without contributing to real activity,” she said.

The latest twist is sudden stress in the overnight lending markets. “We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy,” said Zhiwei Zhang from Nomura.

“There is room to cut interest rates and the reserve ratio in the second half,” wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks.

The journal said total credit in China’s financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output,” it said.

It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens,” it wrote.

The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.

Source: Irish Independent

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Is China Cooking The Books?

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Looks like China has been cooking the books when it comes to its exports according to Bank of America. Things are a lot worse than they are letting on even echoing the pattern in 2008.

Latest research figures carried out by the Bank of America Corp. are set to rock the economies around the world once again. Has China been hiding the real state of its economic data? It would seem that the PRC hasn’t been quite as honest as it might have us all believe! According to the Bank of America Corp., the Chinese trade surplus that was meant to stand at some $61 billion turns out to be a meager mere tenth of that so far this year.

The true figure amounts to only $6 billion and that means it will be the smallest Q1 figure posted since the $10.8-billion deficit in 2004. Research on calculations carried out by the head of BoA’s Greater China Division, Lu Ting, suggests that the supposed tripling of China’s surplus was nothing more than fake, and that China has been cooking the books to appear to be better off than the rest of the world. True figures point to the fact that China’s growth rate is slowing down and that the economy is being restrained rather surging ahead. There’s being growing cause for concern since January this year as it turns out that China has been fibbing about its unemployment figures as well as GDP. Growing skepticism amongst analysts has led to worldwide concern as to the ability to provide real trade data.

Some are saying that the export situation can be likened to 2008 at the very moment when the financial crisis hit the world. China too was plunged into a difficult time as exports decreased back then. Shipments plummeted and out of that panic grew illegal practices in a bid to make money. Irregularities in export data have emerged and allowed for hot-money flows.

True figures seem to highlight that we have had the wool pulled over our eyes as figures show that there is a real growth of just 5% in exports, whereas the PRC has issued figures as high as 17.4%. Similarly, imports have increased by 7.6%, rather than the official government line figure of 10.6%. In a recent Bloomberg poll, investors believe that the Chinese economy is set to deteriorate in the coming year, despite what the official government figures might be stating.

But, it’s no consolation that China’s economy has also taken a downtown like the rest of us. While growth seems to be still partly there, it is definitely slowing down. That could be bad news for the rest of us, in already economic hard times, as we could see a knock-on effect around the world. That’s something we could surely do without right now! This is all in the wake of the Yuan’s all–time high. It currently stands at its highest level for almost twenty years in comparison with the Dollar. The Yen is suffering badly too from the adverse effects of never-before-seen monetary easing policies implemented by the Japanese government. Where do we go from here? Well, questions are now being raised as to how much longer China can withstand a growing Yuan in the face of a failing Dollar and troubled Yen. If it carries on much longer, China can only be on the receiving end of the adverse effects of that.

Source: tothetick

France Is Latest To Sign Currency Swap With China. Who Is Next ?

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France now looks to be the latest country to move away from the dollar as China is busy signing up countries to a currency swap line etc. Further evidence that the dollar will hold a much more minor role in future. Some countries to have signed up in the last few years are :

 

France intends to set up a currency swap line with China to make Paris a major offshore yuan trading hub in Europe, competing against London, the China Daily on Saturday cited Bank of France Governor Christian Noyer as saying.

Yuan deposits in Paris amount to 10 billion yuan ($1.6 billion), making it the second largest pool for the Chinese currency in Europe after London. Almost 10 percent of Sino-French trade is settled in yuan, also called the renminbi or RMB, according to French data cited by the official newspaper.

“The Bank of France has been working on ways to develop a RMB liquidity safety net in the euro area with due consideration of a supporting currency swap agreement with the People’s Bank of China,” Noyer told the English-language newspaper.

The yuan’s internationalization and bilateral financial cooperation could be among the main topics during French President Francois Hollande’s visit to China in late April, the paper said.

French Foreign Minister Laurent Fabius paid a two-day visit to Beijing this week.

The planned swap line would be the latest in a string of bilateral currency agreements that China has signed in the past three years to promote use of the yuan in trade and investment.

It followed a similar step by the Bank of England to set up a reciprocal three-year yuan-sterling swap line with China.

Britain, always anxious to maintain London’s status as Europe’s biggest financial center, launched an offshore yuan currency and bond market to great fanfare last year.

Source: ZeroHedge

WGC: Chinese Move Toward Gold Backed Yuan

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Its been discussed by gold bugs over the last few years but Keith Barron in an interview with King World News talks about  the World Gold Council’s commissioned a report which basically says the Chinese are looking to launch a gold backed yuan. Jim Rickards in his book Currency Wars has written about the obvious move for China to back the yuan with gold and its no secret that China with its large dollar reserves are not happy with how its being debased.  With every major Central Bank flat-out printing money combined with gold repatriation stories and hedge fund Pacific Group converting its holdings to physical gold, one cannot help wonder that 2013 could be a very significant year for gold.

The second thing I want to make KWN readers aware of is the report which was commissioned by the World Gold Council.  This is an incredible document, especially coming from the World Gold Council because it’s basically saying that the Chinese are going to back their currency with gold.  This would, in turn, displace the US dollar and make the Chinese yuan the world’s reserve currency.

 The Chinese are sitting on piles of dollars right now, and while the US continues its decline, the reality is that all of the fiat currencies are in a race to the bottom.  We just saw the Bank of Japan yesterday talk about opening up QE and printing vast sums of money.  This will be an attempt to reverse their deflation with inflation.  This move by the Japanese is very, very bullish for gold.

 But between what is happening with the set up for the coming short squeeze in gold, coupled with the Chinese moving to back the yuan with gold, and the shortages we are seeing in the silver market, the outlook for gold and silver going forward are spectacular.  Quite frankly, the gold and silver bulls are going to begin to trample the bears at some point in the near future.”

Last month Stephen Leeb spoke of a chinese diplomat admitting China’s intention only to backtrack shortly afterwards.

There is a ritual we see in overnight trading.  Gold is usually up $4 or $5 at around midnight or 1 AM east coast time.  I’ll be watching gold trade at this time and I can’t count the number of times that in just a minute or two, instead of gold being up $4 or $5, it’s now down $20.  No one is trading at 12 or 1 or 2 in the morning.  Somebody is doing this and it always happens when there is no liquidity.  So you have a game of desperation going on here and the Chinese are aware of this. 

 I was just speaking to a Chinese diplomat and I said to their diplomat, ‘Your two most important commodities are water and gold.’  And this diplomat said to me, ‘Yes, we need gold to back up the yuan.’  Well this diplomat realized very quickly they had made a terrible mistake in admitting that and began to back off and stated, ‘No, it’s not to back the yuan.  It’s because of jewelry.’  But it was too late, the horse had left the barn so-to-speak.

 So the Chinese get this in spades.  The only way for them to become the world’s powerhouse and continue accumulating materials in the resource war is if they have a currency that’s backed up by gold or they have the actual physical gold itself.

The bottom line here is that when I see gold engaged in one of these drops I know it doesn’t make any sense.  The Chinese let the price of gold dip because they are smart buyers and we are playing into their hands with this ridiculous manipulation.

 This game of manipulation we are engaged in with the gold market is going to stop sooner rather than later.  Time is running out on these schemes and when it does stop and when they lose control, you had better be positioned in gold because this will be a bull market to end all bull markets.”

World Gold Council : – Gold Renminbi Mulit Currency Reserve System

China’s Demand For Gold To Soar

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Although the official figures for China’s Gold reserves are 1054 tonnes its clear that they have been buying up national production while at same time secretly buying physical on the dips. One thing for sure is Chinese gold consumption will continue unabated and soon surpass India.

Considering China’s is the world’s largest gold producer…and their consumption
will be twice their production level what do you think that means for the price
of Gold? Gold 10,000…here we come.

From Shanghai Daily…

CHINA’S gold consumption will more than double the production of bullion by 2015,
the Ministry of Industry and Information Technology said. But China, the second-
biggest consumer in the world after India, will continue to see a wider deficit
in gold supply in the country as consumption is set to surpass 1,000 tons in 2015,
the ministry said in a statement published on its website yesterday.

Although consumption in India remained above China’s in the first three quarters
of the year, the World Gold Council predicts China to become the biggest market
this year, according to its quarterly report unveiled this month.
Since 2007, China has been the world’s biggest gold producer. It aims to produce
between 420 tons and 450 tons of gold in 2015. The country is also the biggest
old jewelry producer, taking up about 60 percent of the global production, according
to the ministry.

According to Jim Willie massive amounts of physical gold has gone East already as faith in allocated accounts have taken a hit due to recent scandals.

Since March 2012, a whopping 6000 metric tons of gold bullion has been shipped from London to the East, primarily China. The circumstances behind the shipments are murky, but they indicate private off-market transactions that are intended to avoid publicity. My suspicion is that old wealthy Chinese families had their Allocated Gold Accounts improperly used in leasing practices by London bankers, associated with posted margin on a gaggle of leveraged contracts spanning from sovereign debt to currencies. The trades went sour. Margin calls were enforced with lost gold in a grand forfeit, the London bankers feet put to the fire reportedly. Publicity was avoided, but in the process a tremendous amount of gold was forfeited. With the gold went a transfer of power, to the East. They will dictate terms of the new trade settlement system. They will become the world’s more prominent lenders. They will control the next geopolitical chapter.

On thing is for sure, the Chinese are well aware of the impending Global financial collapse and are preparing themselves and so should we.

 

Source: The China Money ReportSilverDoctors

China Joins The Party And Turns On The Printing Press

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Amidst the story of Chinese city Dongguan (pop 10million) in the largest province is on the verge of bankruptcy, it has been reported that the Chineese Central Bank is going to join the party and get in on the “beggar thy neighbour” act. The injection of liquidity is to help foster a soft landing to an ever ailing economy. Over $57 billion to be added along with an investment of $1.6 trillion in infrastructure.

China´s Central Bank has decided to join the Fed and ECB in their ´pump in money´ move, injecting a record $57.9bln into the financial system. This is to help create a soft landing for the number two economy amidst the global turbulence.

Such injections can help cut lending rates, but full-fledged success shouldn’t be expected before 2013, Vedomosti daily quotes analysts from the Economist Intelligence Unit.

China’s Government is also trying to heat up its economy by investing $1.6trln in infrastructure.

Despite helping the Chinese economy out of the recession in 2009, such measures this time around could turn out to be inefficient, say HSBC analysts. Today the country faces problems of so-called artificial overheating: sky–high inflation is coupled with a “destructive bubble” in a housing market and growing debt, analysts specified.

As the global economic outlook becomes increasingly gloomy, export oriented China, sometimes referred to as the World Workshop, is set to grow at a much slower pace of around 7% over the next decade, Jim O’Neill, Chairman of Goldman Sachs Asset Management, told Reuters.

The profits of Chinese industrial giants fell 6.2% year on year in August to reach $60.4bln, following a 5.4% drop in July, says the National Bureau of Statistics of China.

 

Source: RT.com

China To Sell Oil In Yuan In Blow To Dollar

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There is a story running doing the rounds regarding Lindsey Williams announcement below that China announced that it will sell oil using the Yuan in a major move away from the dollar. Although no official source was listed in the reblogged articles I did manage to find a few stories below which lends some credibility to Williams claims below:

Lindsey Williams: “The most significant day in the history of the American dollar, since its inception, happened on Thursday, Sept. 6. On that day, something took place that is going to affect your life, your family, your dinner table more than you can possibly imagine.”

“On Thursday, Sept. 6… just a few days ago, China made the official announcement. China said on that day, our banking system is ready, all of our communication systems are ready, all of the transfer systems are ready, and as of that day, Thursday, Sept. 6, any nation in the world that wishes from this point on, to buy, sell, or trade crude oil, can do using the Chinese currency, not the American dollar. – Interview with Natty Bumpo on the Just Measures Radio network, Sept. 11

We already know China has signed trade agreements with various nations to trade in renminbi.Due to the euro crisis in Europe and growing demand from Asia, Russia is looking to export more to China in particular and is already building a pipeline to export to China by the end of 2012 as reported by the StarTribune:

Russia wants to be more than a supplier of natural resources to Asia, however, and is eager to attract the investment it needs to diversify and modernize its economy.

The first pipeline to send oil east to China began operation in early 2011. An extension of the pipeline to a port near Vladivostok is scheduled for completion by the end of this year, and Russia wants to build plants there to produce petro-chemicals and fertilizers, adding value to its exports.

After the APEC conferance it was reported by energyglobal.com  that China will export oil from its Tianjin facility.

The Russian and Chinese governments have agreed to allow oil products to be exported from the Tianjin refinery which is located north of Beijing. The facility is a joint venture between OAO Rosneft and China National Petroleum Corp. Construction of the 13 million tpy facility begun in 2010 and is 51% owned by the Chinese partner. Exporting oil products from the site will have add a major boost to the facility’s profitability.

And from Platts it has been reported of China’s intention to export oil. Although there is no report of what currency the oil is to be sold in, you would have to assume its in renminbi in light of all the trade agreements China has signed.

China has granted the future Tianjin refinery, a joint project of Russia’s Rosneft and China National Petroleum Corporation (CNPC), the right to export its oil products, Russia’s President Vladimir Putin said at a conference Friday.

“Today, at a bilateral meeting the leader of the People’s Republic of China, Hu Jintao, has informed us that the Tianjin joint venture will receive the right to buy and sell oil products, export them and supply to the domestic market,” Putin said at the Asia-Pacific Economic Cooperation CEO Summit in Russia’s Vladivostok.

It is the first time Chinese authorities have granted such a right to a project with foreign capital, Putin said, adding that this is another step in further improving economic relations between China and Russia.

The decision is to support efficiency of the joint project, Rosneft CEO Igor Sechin told reporters on the sidelines of the summit.

According to Rosneft, the refinery will process 13mln tonnes, to put in context, Rosneft exports 40mln tonnes to Europe. Thats not a particularly large amount but who knows where it will lead.

The new refinery will process 13 mln tonnes (95 mln barrels) of oil, of which 9 mln tonnes will be from Russia. The oil will be delivered by tankers to the port of Tianjin and from there via a 42 km pipeline to the refinery. Light product yield will be in excess of 80%. Target markets are Northern China and regions of the country’s Central Plateau, including Beijing, Tianjin, Hebei province, Changzhi, Jinan and Shandong province, as well as the Eastern Chinese seaboard.

I wouldn’t quite claim this is the end of the dollar just yet, but watch this space.

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