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Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.

According to sources “only 27% of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded…”. The Chinese banks seem to be lending money without properly reviewing what the money is being used for.

Infrastructure financing should only be directed to projects with a positive net present value (including financing repayment costs). Anything else indicates funds are being directed to unproductive assets. Pehaps the assets have a long-term strategic value to China as a whole – infrastructure often does. After all, how many of the original railway companies in America still exist? 

Regardless of the long term value, the short term cost of negative NPV projects is potential default. The American and British railway booms all ended in busts.

A recent China Banking Regulatory Commission report agrees:  “the possibility of a rebound of credit risks or losses remains high” due to the sheer volume of lending and a lack of scrutiny over credit-worthiness. Classic.

What is the real exposure to these (toxic) assets?

Just as it was with the exposure to packaged sub-prime mortgages in the US, it is difficult to determine what the banking system exposure is to Chinese infrastracture debt. China appears to be in many ways following in America’s footsteps and its banks are moving exposure off balance sheet in a game of hide and seek. This is resulting in a growing concern over the financial stability of the Chinese banking system.

However, Moodys (yes, Moodys) is arguing that Chinese banks are unlikely to face systemic risk.

Abstract:

Recent studies have linked climatic and social instabilities in ancient China; the underlying causal mechanisms have, however, often not been quantitatively assessed. Here, using historical records and palaeoclimatic reconstructions during AD 10–1900, we demonstrate that war frequency, price of rice, locust plague, drought frequency, flood frequency and temperature in China show two predominant periodic bands around 160 and 320 years where they interact significantly with each other. Temperature cooling shows direct positive association with the frequency of external aggression war to the Chinese dynasties mostly from the northern pastoral nomadic societies, and indirect positive association with the frequency of internal war within the Chinese dynasties through drought and locust plagues. The collapses of the agricultural dynasties of the Han, Tang, Song and Ming are more closely associated with low temperature. Our study suggests that food production during the last two millennia has been more unstable during cooler periods, resulting in more social conflicts owing to rebellions within the dynasties or/and southward aggressions from northern pastoral nomadic societies in ancient China.

Full text available

…and finally, here’s the new New York Times profile

US Senate Candidate, Founder of Euro Pacific Capital & Successful Author (NEW BOOK “How an Economy Grows and Why It Crashes”). Schiff tears apart the ‘recovery’ and points to a precipitous decline in the US dollar. Don’t listen at your own risk.
AUDIO

Bill Fleckenstein

President of Fleckenstein Capital, a money management firm based in Seattle. The outspoken critic of Alan Greenspan rails on the mess that the money printers have left us.
AUDIO

John Williams

Founder of Shadow Government Statistics Newsletter and Specialized Economic Consulting Services: Analysis Behind and Beyond Government Economic Reporting. A resolute independent, Williams cracks open our suspicions that the mainstream media is rigged.
AUDIO

Matt Simmons

Founder and Chairman of the Board of the Ocean Energy Institute & Former Chairman Emeritus of Simmons & Company International. Simmons presents some scary thoughts on the BP disaster…putting his own reputation on the line. Let’s pray that Simmons isn’t right.
AUDIO

Absolute Must Listen: Ben Davies

CEO of Hinde Capital – Ben ran trading for RBS Greenwich Capital in London where he managed a macro portfolio. Davies presents the stunningly convincing case for gold.
AUDIO

Jeffery Saut

Managing Director & Chief Investment Strategist for Raymond James – Jeffrey known for his insightful market commentary is a regular on Wall Street Week, CNBC, Bloomberg TV and more. A fantastic interview for a surprisingly opinionated CIS of a mainstream broker – Saut has been a leading thinker in the investments industry for a long, long time.
AUDIO

James Turk

Chairman and Founder of Goldmoney.com – James has written “The Freemarket Gold & Money Report,” an investment newsletter since 1987. Turk makes the ultimate case for the barbaric relic, highlighting its true value vs. its price.
AUDIO

Source: KingWorldNews

How China’s Economy is Already Bigger Than the US.

China has already surpassed the US in the global competition sweepstakes and is on track to extend its lead. No, I’m not talking about some pie in the sky 2030 or 2050 forecast from some hole in the wall research boutique. I’m referring to right now, today, this minute. At the end of 2009, America could boast a GDP of $14.2 trillion, while China’s stood at $4.9 trillion. The Middle Kingdom will grow by at least 10% this year, generating $490 billion in new GDP, while the US, growing at only an average 3% rate, will add $425 billion in this key measure of economic muscle. That easily makes China the world’s largest country in terms of new business activity, and therefore, the most important when gauging the future direction of financial markets.

This is why I have been feverishly pounding the table this year screaming that it’s all about China, China, China. It’s also why I announced to readers why I’d rather get a poke in the eye with a sharp stick than buy equities. Since then, the Chinese stock markets have been falling, not in a great cataclysmic crash, but in a slow death by a thousand cuts. Chinese equity PE multiples have fallen from 50, three years ago, to 10 today, and there are still no buyers.

Money managers and financial advisors of all stripes only need to make one call this year: when will the Chinese economy turn? This is harder than it sounds because it means that your entire investment strategy is now dependent on unreliable, contradictory, and untimely data, from a third world nation that only recently moved on from the abacus to measure business activity. When good data does become available, you can then count on the locals to front run and inside trade the first 10%-20% of the move. That will leave you with the difficult choice of getting in late, or not at all.

I never said this was going to be easy. So I’ll give you a head start and tell you when this will happen: the day before the People’s Bank of China stops tightening. This is why hedge funds have kept a laser like focus on Chinese bank reserve requirements, which now stand at 17.5%.

When the slowdown does end, every stock, bond, currency, and commodity market will do so as well. Focus first on the things that the Chinese have no choice but to buy. Just go down their list of largest imports, and you’ll find oil, iron ore, coal, food, copper, and machinery. You can also buy the suppliers of these commodities, including Australia, Canada, and their currencies.

There is a huge buy setting up here, but the overwhelming verdict of the markets is “Not Yet”! While I’m waiting for the big trade, you can find me having lunch at a restaurant on Grant Street in San Francisco’s Chinatown, eating chop suey and egg foo yung, pestering the waiters for the names of the next hot IPO’s.

The nation’s 13.6 trillion yuan of new loans in the past 17 months, bigger than the economies of South Korea, Taiwan and Hong Kong combined, is “unprecedented in 400 years of economic history,” said London-based hedge fund manager Hugh Hendry, co-founder of Eclectica Asset Management.

Read the full article

Consumption when brought forward must be financed, and that financing is a two-way bargain between borrower and creditor. When debt levels become too high, lenders balk and even lenders of last resort – the sovereigns, the central banks, the supranational agencies – approach limits beyond which private enterprise’s productivity itself is threatened. We have arrived at a New Normal where, despite the introduction of 3 billion new consumers over the past several decades in “Chindia” and beyond, there is a lack of global aggregate demand or perhaps an inability or unwillingness to finance it. Slow growth in the developed world, insufficiently high levels of consumption in the emerging world, and seemingly inexplicable low total returns on investment portfolios – bonds and stocks – lie ahead.

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