Monday, June 29, 2009

China's banks are an accident waiting to happen

And we may all be screwed.
Great. Another accident waiting to happen.
China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.
Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.
Fitch Ratings has been warning for some time that China's lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.

Trouble is of course, Australia's hopes of avoiding at least a technical recession and then powering out of the down turn and returning the budget to surplus quickly are basically dependent on China.

But it's banks "exposure to corporate debt has reached $4,200bn. It is rising at a 30pc rate, even as profits contract at a 35pc rate."

While China's Banking Regulatory Commission has urged that lending be devoted to the "real" economy, the problem is that it's real economy is based upon "a mercantilism export model that has crashed and burned. Chinese exports were down 26pc in May."

As the article's author notes, "a trade policy based on the assumption that debtors in the Anglosphere and Europe's Club Med can ruin themselves for ever is absurd."

Oh dear. This means big trouble for everyone if it works out as badly as these people fear it may.

Andy Xe, a Si no-bear and commentator for Caking, said Western analysts are in for a rude shock if they think that China's surging demand for raw materials implies genuine recovery.

Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation," he said.

Mr Xe thinks the spring recovery is an inventory spike, to be followed a double-dip downturn into next year as stimulus wears off.

The piece concludes: "If the world's biggest surplus state ($400bn) is too structurally deformed to help offset the demand shock as Western debtors retrench, we are trapped in a long deflation slump."

You can see why the current federal government is itching to call an early general election.

As I say above, the government's strategy is essentially based upon Chinese growth pulling us along with it. If that growth doesn't happen, or doesn't happen strongly enough, then that's the end of the government's strategy.

But wait, there's more!

THE Rudd government's fiscal stimulus packages may provide no more than a temporary boost to growth, and be followed by an extended period of economic stagnation.

The only international body to correctly predict the financial crisis - the Bank for International Settlements (BIS) - has warned the biggest risk is that governments might be forced by world bond investors to abandon their stimulus packages, and instead slash spending while lifting taxes and interest rates.

Thanks to the previous Howard Government, Australia does have one of the lowest levels of public debt in the world, but we are also running the third largest fiscal stimulus package after the US and South Korea and this still represents a huge burden that is going to be placed upon future generations.

I don't believe for a minute that the budget is going to return to surplus when the government says it will, and I suspect it 'aint going to any time soon. The proposition that the Australian economy is going to be growing in excess of the long term rate in just two years is nothing more than wishful thinking I reckon.

Even more so if these fears about the Chinese banking system prove to be correct.

Here's a visual metaphor of what may happen. This is a brand new, but thankfully unoccupied, 13 storey building in the Mincing district of Shanghai. Three days ago it just fell over.

Posted via email from Garth's posterous


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