Compelling reading in "The Diplomat" on the twin problems threatening to shake the very foundations of the Chinese banking system - if they ever become too large to be hidden any more. Go read the whole thing. When reading the following excerpts, note that there's about 10 yuan to the pound sterling:
[...] If the share of dud loans should reach 20 percent, a far more likely scenario, Chinese banks would have to write down 2 to 2.8 trillion yuan, a move sure to destroy their balance sheets.So the banks themselves may have got sheaves of bad loans and are desperately collaborating to conceal them, in the knowledge that once one brick in the dam goes, the others follow shortly after. But what about the consumers and individual investors?
The Chinese government, to its credit, was also aware of the danger of this ticking debt bomb. Unfortunately, it used a solution that merely delayed the inevitable. In the first half of this year, Beijing announced a policy of mandating banks to extend by one more year the deadline for local governments to repay their bank loans that were about to mature. This move was taken, in all likelihood, to conceal the festering problem in the financial sector during the year of leadership transition. But it did nothing to defuse the debt bomb.
Because of very low-yield for savings by Chinese banks (since deposit rates are regulated) and competition among banks for deposits and new fee-generating businesses, a complex, unregulated shadow banking system has emerged [...] To evade regulatory oversight, these [short-term investment] products do not appear on a bank's balance sheet. [...] China had about 10.4 trillion yuan in wealth management products, about 11.5 percent of the total bank deposits, at the end of June this year.Chinese citizens can't get squat in interest for their money, so the only way to even approach a return matching inflation is to invest in increasingly risky vehicles, property and development projects, with very little effective regulation and risk management by whatever the Chinese equivalent of the FSA / SEC is - if it has one.
This second point squares with several articles from John Hempton's hedge fund blog at Bronte Capital where he's been discussion the outright frauds and other extremely suspicious behaviour in the Chinese banking, equities and investments. In his Chinese kleptocracy post he notes:
Most Chinese savings however are not invested in see-through apartment buildings. Bank deposits still dominate. The Chinese banks are the finest deposit franchises in human history. They can borrow huge amounts at ex-ante negative real returns.All this seems to be coming together to create a near-perfect storm of fraud, abuse, property and asset bubbles, massive stock market fraud and inflated earnings, looting by connected people and a shafting of the Chinese middle- and lower-class that is likely to make the Western mis-selling and mortgage fraud of 1998-2008 look like the epitome of good financial practice.
And those deposits are mostly lent to State Owned enterprises.
I think we're going to see a steady and increasing stream of hard assets and hard currency sneak out of China, as those with sufficient connections to move their wealth and families abroad do so. Eventually there is going to come a point where the insolvent banks can no longer be concealed even if a dictatorial Government is willing to try, and the unrest that results is going to have quite the butcher's bill.
Can it be fixed? I don't think anyone who is in a position to even try to fix it is going to be willing to try; you're much more likely to put yourself in the firing line when things inevitably do go bad. And "the firing line" in Chinese politics is no euphemism.