Apakah Cina Mulai Kehabisan Tenaga?

Apakah Cina Mulai Kehabisan Tenaga?

November 26th, 2013

“The speed and depth of the Chinese policy response will help determine the severity and duration of this crisis. If the Chinese address the issue quickly and move decisively to rein in credit expansion and accept a period of much lower growth, they may be able to use the government and People’s Bank of China’s balance sheet to cushion the adjustment in the economy. If, however, they continue on the current path and allow this deterioration to reach its natural and logical limit, we will likely see a full-scale recession as well as a collapse in asset and real estate prices sometime next year. China’s direct contribution to global growth is enormous, but perhaps equally as important is its role in generating growth in developed and emerging economies. A slowdown, whether significant or extreme, in the Chinese economy heralds very bad news for asset prices around the world. A growth crisis centered in Asia will further exacerbate the instability and volatility in Japan and have a devastating impact on second derivative marketplaces such as Australia, Brazil and developing markets in South East Asia.”

            — Hayman Capital’s Kyle Bass

Model pertumbuhan ekonomi Cina terlihat timpang – telah menyia-nyiakan sumber daya pada skala belum pernah terjadi sebelumnya. Kota-kotanya kosong, kapasitas industri berlebihan dan kredit konstruksi yang jatuh tempo terus mengotori perekonomian negara.

New lending yield terus merosot di bawah pertumbuhan yang meningkat. Dan yang terburuk adalah proyek-proyek konstruksi tidak menghasilkan cukup uang menutup hutang-hutangnya.

Perekonomian Cina, seperti kebanyakan yang lain, bertumpu pada fondasi kredit yang goyah. Negara ini telah membuat sesuatu yang akan memberikan ledakan terbesarnya dalam sejarah – ledakan yang akan dipicu oleh pertumbuhan yang tidak berkelanjutan dalam pasokan uang dan kredit.

Bahkan, hutang pasar negara berkembang diasumsikan akan menyerupai krisis subprime mortgage tahun 2007 silam, dengan pusat episentrum di Cina.

Berikut adalah penjelasan singkatnya dalam sebuah headline di London Telegraph:

Fitch Says China Credit Bubble Unprecedented in Modern World History

“The credit-driven growth model is clearly falling apart,” says the agency’s senior director in Beijing. In early June, China’s interbank-lending rates came unhinged.

On June 8, for instance, the overnight repo rate jumped more than 100% to 9.78%. Another key interbank rate set by the National Interbank Funding Center has jumped 336% since May.

By June 21, the country’s leading commercial bank, the Bank of China, was denying that it had defaulted. This should be the first of many such denials, which will then be followed by full-blown defaults.

Here’s another headline hinting at the depth and breadth of the unfolding crisis: “Bond Auctions Fail from Russia to Korea.”

Artikel itu mencatat bahwa lonjakan yield global membuat perusahaan dimanapun akan melakukan “delay funding efforts.” Dengan kata lain, krisis belum berakhir.

Selama enam bulan terakhir Cina telah menyuntikkan dana lebih dari $1,6 triliun untuk kredit baru (21% dari PDB) di dalam perekonomiannya. Jika memang terjadi krisis kredit di sana, meskipun  masih menambah sedemikian besar kredit ke perekonomian, maka masalahnya tentu akan besar.

Hanya untuk memastikan bahwa Anda sungguh memahami krisis kredit yang berkembang di Cina, saya memiliki tiga laporan menarik Tyler Durden dari http://www.zerohedge.com yang masuk dalam kategori HARUS DIBACA:

1)   China To Kick Bad Debt Hornets Nest (July 28th)

The last (and first) time China’s National Audit Office conducted an audit of local government debt two years ago, in June 2011, it found that local governments and their various financing vehicles had taken on 10.7 trillion yuan of debt as at the end of 2010, which brought the issue of “underreported” high leverage in China to the fore. In the then words of Liu Jiayi, the country’s auditor-general, “some local government financing platforms’ management is irregular, and their profitability and ability to pay their debt is quite weak.

Others quickly chimed in: UBS estimated that local government debt could be 30 percent of gross domestic product and may generate around 2 to 3 trillion yuan of non-performing loans. Credit Suisse economist Tao Dong said it was the biggest “time bomb” for China’s economy. This was the most explicit warning about a credit bubble in China both internally and from “credible” outsiders (not fringe blogs and “conflicted” short-sellers) that had be uttered to date. It certainly wouldn’t be the last as the recent aggressive attempts at deleveraging and reform in the financial system have shown.

Overnight, nearly two years after the first such audit, China announced it is conducting a follow up nationwide inquiry into government borrowings, “as the nation’s growth slowdown puts pressure on the new leadership to determine the extent of potential bad debts weighing down the economy.”

So why now? Bloomberg has some suggestions:

The State Council, under Premier Li Keqiang, requested the National Audit Office to conduct a review, according to today’s statement from the audit office’s website, without providing any more details. The first audit of local government debt found liabilities of 10.7 trillion yuan ($1.8 trillion) at the end of 2010, the National Audit Office said in June 2011. 

Local-government financing vehicles need to repay a record amount of debt this year, prompting Moody’s Investors Service to warn Premier Li may set an example by allowing China’s first onshore bond default. Local governments set up more than 10,000 LGFVs to fund the construction of roads, sewage plants and subways after they were barred from directly issuing bonds under a 1994 budget law. A 4-trillion-yuan stimulus plan during the 2008-09 financial crisis swelled loans to companies, which they have been rolling over or refinancing with new note sales.

LGFVs may hold more than 20 trillion yuan of debt, former Finance Minister Xiang Huaicheng said in April. That’s almost double the figure given by the National Audit Office in 2011. Refinancing will be a challenge after corporate bond sales slumped to a two-year low in the second quarter and policy makers cracked down on shadow banking activities that bypass regulatory limits on lending.

In other words, China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nose bleeding-inducing $1 trillion, or roughly 15% of China’s goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is).

Of course, now that China has set off on a reform path of active deleveraging, the “disclosures” about the true state of the world’s biggest housing bubble (one that makes even Bernanke green with envy) are about to start coming fast and furious. And since LGFV debt is just one small part of the Chinese debt bubble and accounts for a tiny fraction of total consolidated Debt/GDP (recall that just Chinese corporate debt is the largest relative to the nation’s GDP anywhere in the world), another theme we have covered extensively in the past, most recently here, one can only wonder what other “discoveries” lie in store.


Nico-39For a few suggestions of what else may be uncovered soon, here are some excerpts from Morgan Stanley’s recent report “China Deleveraging: A Bumpy Ride Ahead”:

In the aftermath of the global financial crisis, monetary rather than fiscal policy likely played a bigger role in boosting domestic demand in China. This can be seen by the rise in bank credit to GDP. China’s total outstanding bank credit picked up from 102% of GDP in December 2008 to 133% of GDP in June 2013, thereby boosting domestic demand. Indeed, total outstanding bank credit has increased by US$7.2 trillion over December 2008 to June 2013 (Exhibit 9). Also, the non-loan sources of credit such as wealth management products, trust loans and bonds (total social financing) increased by US$3 trillion over the same period. Though policy makers’ stimulus was targeted at both investment and discretionary consumption by households, a large part of this funding was channeled into investment, with 70% of the loans going towards the corporate sector over this period.


China’s incremental GDP return from leverage has been declining…


Credit-Driven Growth Has Reached Its Limits

Signs abound that the strategy of pursuing growth via credit has reached its limits. Indeed, policy makers are getting concerned about financial stability risks and the misallocation of capital. Some of the key indicators, raising questions about the sustainability of the current trend, are as follows:

               #1: Weakening productivity of incremental credit

The asset quality issue in the banking system is the other side of the coin to the loss in capital productivity that we described earlier. Following the 2008 global financial crisis, there was only a brief period of four quarters in 2011 when nominal GDP growth outpaced credit growth. However, in the past six quarters, loan growth has again been outpacing nominal GDP growth. As of June 2013, nominal GDP growth was 8.0% compared with credit growth of 15.1% YoY (Exhibit 16).


This is a reflection of the weakening productivity of incremental credit in our view. If one instead uses social financing (the broadest possible measure of credit) as the gauge, the divergence with nominal growth is even more concerning. In light of current trends, we believe any attempt to push the overall investment growth engine further will only increase the risk of a deeper and prolonged shock later on as it exacerbates the problem of excess capacity, and the continued buildup of leverage and weak profitability growth weighs further on corporate  balance sheets.

               #2 Interest rates higher than nominal output growth of secondary sector

The nominal benchmark 1-year lending rate at 6% and producer price inflation at -2.7% imply a real borrowing cost of 8.7% for the corporate sector. However, the true cost of borrowing for the corporate sector is likely higher, given that the weighted average lending rate in the banking system was 6.7% in March 2013 and non-banking borrowing would come at an even higher cost. In comparison, real growth in secondary sector output stands at 7.6%YoY in June 2013 (Exhibit 17).


While CPI is typically used to compute real rates, we have used PPI in China because the bulk of the leverage buildup has been predominantly due to corporates and not households. In any case, the conclusion remains unchanged even if we were to compare nominal interest rates with nominal output growth of the secondary sector (Exhibit 18).


The latter now is 5.1%, lower than nominal corporate borrowing costs. A higher interest rate relative to the underlying income growth means that debt is compounding at a much faster pace than underlying income growth and the debt trajectory ultimately becomes unsustainable. This challenge has emerged because nominal GDP growth has decelerated significantly in the last few quarters. On the other hand, policy makers have been hesitant to cut rates owing to concerns about sending the wrong signals to entities that have overinvested. The current real  interest rate environment will likely exacerbate the asset quality issues in the banking system. Indeed, historical episodes of risk aversion in the financial system in both the US and Japan have also taken place when real rates exceeded real GDP growth.

And so we get to the point where one more country has reached the end of the can-kicking road, and is about to kick the only remaining thing it can instead: the hornets’ nest of a truly epic debt bubble.

2)   China’s “Childish” Bond Market Crosses Tipping Point (August 16th)

That China faces a number of serious economic (and potentially social) problems is no surprise and as Guggenheim’s Scott Minerd notes, trying to predict when persistent structural problems will lead to a shock for markets is extremely difficult (as we noted here). However, from a symbiotic collapse in the previously ‘virtuous’ bond-market-to-banking-system relationship, to the drying up of easy credit for all but the largest (and least over-capacity) firms, it appears that China’s private sector leverage has crossed the tipping point that signalled crises in the US, UK, Japan and South Korea. Although the recent data (believe it or not) show signs of stabilization in the Chinese economy, the elevated debt burden should continue to cast doubt over its growth sustainability and the “childish” and non-transparent nature of China’s bond market offers little or no hope for a free market solution.

On China’s “childish” bond market (as we noted here),

(via WSJ),

Worried about a boom in lending by the country’s fast-growing “shadow banks,” China created a cash crunch in June to squeeze their source of funding.

One unintended consequence, though, was a selloff in the country’s $4 trillion bond market.


The selloff – triggered by banks selling bonds to raise cash – bolstered critics of China’s financial system, who point to its bond market as an under recognized risk to the country as it struggles to control surging lending amid a weakening.


               The market trails only the U.S., Japan and France in size,


“China’s bond market is like a child compared to that in other countries,” said Jing Wang, deputy general manager of fixed income at Goldstate Securities Co. which has pared back its holdings of Chinese bonds following the selloff, because it has concerns about near-term volatility and “the lack of transparency in the market” in the long run, he said.


“The goal of developing the bond market is to reduce the dependence on banks for funding, but at the end of the day the risk is back to banks again,”

On China’s real-economy cash crunch and the rising potential for social unrest,

(via NYTimes),

a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted.

Now the leading purveyors of Western fashions are deserted, monthly sales at restaurants are down as much as 97 percent and the marble entrance to the Fortune Garden Club is shuttered. All but one of the city’s car dealerships have failed.


“It’s an economic crisis just like the United States has had; just like it,” said Wang Ting, an operator of an illegal casino in Fugu, near Shenmu. “There’s no cash, everyone stays home without a job, there’s no way the economy can recover.”

                “Almost no one will give you a loan,” said a construction executive


                “It’s a national problem, it’s not a local issue,” he said.


 Public discontent is fueling street protests. Several thousand residents turned out in mid-July for a demonstration in the expensively paved square across the street from city hall, demanding that municipal officials revive the stalled economy.

China Approaching a Tipping Point?

(via Guggenheim’s Scott Minerd),

The massive build up of leverage in the Chinese financial system continues to represent one of the greatest risks to the world economy, with some estimates putting total Chinese debt at over 200 percent of GDP. China now represents 16 percent of global GDP, and contributed approximately 30 percent of the increase in global GDP in 2012. A crisis in its financial system could have damaging effects on global output and particularly on countries such as Singapore, South Korea, and Australia, which have large export exposure to China. The higher China’s debt levels climb, and the longer the country’s other structural economic issues — such as a consumption/investment imbalance, and an overheating property market — remain unresolved, the more severe the fallout will be should a credit crisis occur.

Trying to predict when persistent structural problems, such as those facing China, will lead to a shock for markets is extremely difficult. The evolution toward a breaking point can take months or years, and equally challenging is predicting how long the crisis could last. Pressure in the United States’ housing market reached its peak in 2006, for instance, but the most significant damage to markets did not occur until 2008. Despite the difficulty in putting a timeframe on a potential sequence of events, we can be certain that the margin of safety for global investments is thin and continues to recede.

For perspective, throughout my career, I have never been through a period of longer than five or so years without encountering a highly damaging financial incident. Mexico’s 1982 economic crisis, the stock market collapse of 1987, the credit crunch of 1989, the bond market collapse in 1994, the Asian financial crisis of 1997-1998, the bursting of the dot-com bubble from 2000 to 2002, and the U.S. subprime mortgage crisis which began unfolding in 2007 and bottomed in 2009 are like the tolling of a bell. As we move further into the second half of 2013 and 2014, it would not be a surprise to hear it toll again…and investors would do well to remember the 17th century words of John Donne, “…never send to know for whom the bell tolls; it tolls for thee.”


A rapid increase in private sector leverage in a relatively short period of time often presages major financial crises. Historical examples include the collapse of the Japanese property bubble in 1990, the financial crisis in South Korea in 1997, and the most recent crises in the United States, Britain, and the euro zone, which all happened after private sector debt surged to or above 170 percent of GDP. Chinese private sector leverage has reached this significant level. Over the past four years, non-financial private sector debt in China has more than doubled, primarily driven by massive corporate borrowing endorsed by government officials to maintain economic growth rates.

Although the recent data show signs of stabilization in the Chinese economy, the elevated debt burden should continue to cast doubt over its growth sustainability.

3) Big Trouble In Massive China: “The Nation Might Face Credit Losses Of As Much As $3 Trillion (November 19th)

The following chart from Bloomberg showing official Chinese NPL data has its pros and cons.


The pros: it shows that the trend in improving NPLs has dramatically inverted in the past ten quarters and has risen to the highest in at least three years.

The cons: the chart, which again is based on official data, is woefully misrepresenting and underestimating just how profound the bad debt situation is in a country in which each month pseudo-nationalized banks issue loans amounting to the same or more in new liquidity as the Fed and BOJ do combined!

That the Chinese reality “on the ground” is far worse than what is represented was known to Zero Hedge readers over a year ago. For those who may have forgotten, on November 5, 2012 we showed “The Chinese Credit Bubble – Full Frontal” and specifically this chart.


And of course  “The True Chinese Credit Bubble: 240% Of GDP And Soaring” from April:

What is even more concerning is that in order to maintain its breakneck economic “growth” of ~8% per year, China has to continue injecting massive amounts of debt, the so called “credit impulse” or “flow” which according to assorted views, is what is the true driver of an economy, and where GDP growth is merely a reflection of how much credit is entering (or leaving) the system.

The chart below shows that total Chinese social financing flow just hit a record for the month of March.


Completing the picture is the estimated economic response to a surge
in credit. As the last chart shows, in China the biggest benefit to a surge in flow is felt in the quarter immediately following the credit injection, as one would expect, with the effect tapering off and even going negative in future quarters, thus requiring even more debt creation to offset the adverse impacts of prior such injections.


What should become obvious is that in order to maintain its unprecedented (if declining) growth rate, China has to inject ever greater amounts of credit into its economy, amounts which will push its total credit pile ever higher into the stratosphere, until one day it pulls a Europe and finds itself in a situation where there are no further encumberable assets (for secured loans), and where ever-deteriorating cash flows are no longer sufficient to satisfy the interest payments on unsecured debt, leading to what the Chinese government has been desperate to avoid: mass corporate defaults.

But while China’s debt – an arcane mixture of public, private, and pseudo-government backstopped credit – is among the biggest in the world, the one outstanding question was how much longer can China keep sweeping the hundreds of billions if not trillions of discharged, bad loans under the carpet and pretend everything is fine.

Today we get some much needed perspective on this topic courtesy of Bloomberg, which has some very disturbing revelations.

       Such as this:

An unidentified local bank reported a 33 percent nonperforming-loan ratio for the solar-panel industry, compared with 2 percent at the beginning of the year, with the increase due to Wuxi Suntech, China Business News reported in September.

      And this:

China’s lending spree has created a debt burden similar in magnitude to the one that pushed Asian nations into crisis in the late 1990s, according to Fitch Ratings.

As companies take on more debt, the efficiency of credit use has deteriorated. Since 2009, for every yuan of credit issued, China’s GDP grew by an average 0.4 yuan, while the pre-2009 average was 0.8 yuan, according to Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

      And this:

“The real situation is much worse than the data showed” after talking to chief financial officers at industrial manufacturers, said Wendy Tang, a Shanghai-based analyst at Northeast Securities Co., who estimates the actual nonperforming-loan ratio to be as high as 3 percent. “It will take at least one year or longer for these NPLs to appear on banks’ books, and I haven’t seen the bottom of deterioration in Jiangsu and Zhejiang yet.”

      And this:

China’s credit quality started to deteriorate in late 2011 as borrowers took on more debt to serve their obligations amid a slowing economy and weaker income. Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.”

Meanwhile, China’s total credit will be pushed to almost 250 percent of gross domestic product by then, almost double the 130 percent of 2008, according to Fitch.

      And this:

Based on current valuations, investors are pricing in a scenario where nonperforming loans at the largest Chinese banks will make up more than 15 percent of their loan books, according to Werner, who forecasts a 2.5 percent to 3.5 percent bad-loan ratio by the end of 2015. A further decline in GDP growth would lead to more soured loans and weaker earnings, he said.

Lenders so far haven’t reported significant deterioration in loan quality. Bank of China said it had 251.3 billion yuan of loans to industries suffering from overcapacity as of the end of June, accounting for 3 percent of the total. Its nonperforming-loan ratio for those businesses stood at 0.93 percent, the same level reported for the entire bank.

All of the above is driven by one main factor – a relentless desire to fund China’s epic scramble into record overcapacity – after all got to keep that goalseeked GDP above 7% somehow – which in turn has resulted in the producers competing themselves right out of solvency:

Shipbuilding isn’t the only industry affected by overcapacity. Also in Jiangsu, about 130 kilometers (80 miles) southwest of Nantong, Wuxi Suntech Power Co., the main unit of the industry’s once-biggest supplier, went bankrupt with 9 billion yuan of debt to China’s largest banks, according to a Nov. 12 report by Communist Party-owned Legal Daily. Suntech Power Holdings Co. (STPFQ), the parent firm, defaulted on $541 million of offshore bonds to Wall Street investors.


Shang Fulin, China’s top banking regulator, this month urged lenders to “seek channels to clean up bad loans by industries with overcapacity to prevent new risks from brewing” and refrain from dragging their feet in dealing with the issue.


Government and banks’ support for the solar industry since late 2008 has resulted in at least one factory producing sun-powered products in half of China’s 600 cities, according to the China Renewable Energy Society in Beijing. China Development Bank, the world’s largest policy lender, alone lent more than 50 billion yuan to solar-panel makers as of August 2012, data from the China Banking Association showed.

China accounts for seven of every 10 solar panels produced worldwide. If they ran at full speed, the factories could produce 49 gigawatts of solar panels a year, 10 times more than in 2008, according to data compiled by Bloomberg. Overcapacity has driven down prices to about 84 cents a watt, compared with $2 at the end of 2010. The slump forced dozens of producers like Wuxi Suntech into bankruptcy.

The downside is well-known: should the people not get paid, riots inevitably ensue. This is why the government will keep on bailing out and pretending the local loans are viable, until it no longer can.

“The central government is hawkish in its tone, but when it comes to execution by local governments, the enforcement will be much softer,” Bank of Communications’ Lian said. “Many of these firms are major job providers and taxpayers, so the local government will try all means to save them and help them repay bank loans.”

When hundreds of unpaid Mingde Heavy workers took to the streets for a second time last November, the local government stepped in by lining up other firms to vouch for Mingde so banks would renew its loans. Mingde Heavy avoided failure by entering into an alliance with a shipping unit of government-controlled Jiangsu Sainty Corp., which also imports and exports apparel.

As for the CNY64 trillion question of how much long the government can pretend all is well, the following may be useful.

The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.

In summary: enjoy the relative calm we currently have thanks to Bernanke’s, Kuroda’s (and soon: Draghi’s) epic liquidity tsunami which is rising all leaking boats. The invoice amounting to trillions in bad and non-performing loans around the entire world, and not just in China, is in the mail.


Krisis kredit Juni lalu merupakan tanda besar awal bahwa kredit macet trilyunan dolar Cina tidak bisa lagi disembunyikan.

Kredit macet (NPLs) Cina sungguh mengerikan dan terus meningkat setiap hari.

Kenyataan ini tidak dapat disembunyikan lagi karena sudah muncul ke atas permukaan.

Cina kini mengalami krisis kredit yang sangat serius, mirip dengan krisis AS 2007 yang memicu krisis keuangan global. Siapa pun yang berharap perbaikan di perekonomian Cina akan sia-sia.

Ini memang bukan berarti roda perekonomian Cina akan jatuh.

Apa yang akan terjadi adalah seberapa jauh model pertumbuhan Cina tersebut akan mengandalkan kredit (pinjaman).

Seluruh pencapaiannya yang mudah sudah dilewati, kini pencapaian yang akan diraihnya adalah yang lebih sulit.


Terima kasih sudah membaca dan semoga beruntung.

Dibuat Tanggal 25 November 2013