This certainly sounds terrifying to me:
And now, for today’s real news: “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. Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said.” Got China CDS? Because this is the point where one follows Hugh Hendry’s advice about that whole panic thing.
Why should we not be scared by this news?
I have a towel.
Because local governments aren’t dependent on cash revenue to repay debts?
John, look. ZeroHedge is in the business of promoting panic, because that makes it easy for them to generate page hits. The accuracy of their chicken little prognostications, though? It’s pretty low.
some other guy
China has around $2.5 trillion US dollars in reserve. I can’t imagine them going bankrupt any time soon.
Foreign investors who bought whatever the Chinese equivalent of municipal bonds are probably screwed, but AFAIK that’s not a huge number of US investors.
You should not be panicked by this “news” because it is coming from an extreme rightwing conspiracy addled anti-government teabagger website. Find out what, say, Calculated Risk thinks–assuming that there is significant information. Jeez.
Because I planted those apple trees years ago and just put a fresh coat of laquer on the rain barrel I wear while retailing?
You mean, other than the fact that the piece is anonymously sourced, relies on non-public data that can’t be verified, and is internally inconsistent (the arithmetic in the quote doesn’t make sense)?
Sometimes Chicken Little is right. Not today.
Okay, two questions:
1) how do you generate cash from an infrastructure project that isn’t a toll road?
2) are these projects *in* China? Or projects China has funded elsewhere around the world?
@Omnes Omnibus: You are one hoopy frood.
I’m gonna go with “anonymous source”. Anything tagged with that can be modestly ignored with only moderate watching if things may blow up.
Chinese banks numbers have never made sense. The whole sector is so tightly controlled, secretive, & tied into the government that to treat them as private companies would drive you insane while the bankers just go about their business, whatever it really is.
As others have pointed out above, but I’ll chime in too, government infrastructure generally needs 30 years to “pay out” and by pay out I mean allowed businesses to move goods more cheaply (roads), allowed citizens to live longer, healthier (sewer, hospital), made citizens into better citizens so everyone makes more money (to be strictly crass here) (schools). Eventually this leads to a better tax base that can be turned into real cash, but not in 3 years, more like 8-10 for starters.
I guess it says something that the right consistently and across the board doesn’t understand what essential role governments bring to the table under capitalism. (to again be crass). Businesses have no business getting involved in 30 year pay out timelines where they won’t see the cash returns directly.
You know where your towel is?
@jeff: That’s not really accurate. The financial blogs have been a good source of analysis of what’s really happening — as opposed to what Geithner et al would like us to believe is happening. Those blogs are basically right-wing when it comes to prospective policy, but most of what they report explains why so many people are jobless. In other words, you can fault them for arguing for eliminating the minimum wage, but that policy view has little to do with their view of the current economy — that it is in really bad shape, and that most important people and the press want to continue to extend and pretend.
I heard about possible money problems in Europe because the banks may not have the capital on BBC news. I didn’t hear anything about Asia though…
Because it makes no sense? Unless, as someone said, these are all toll roads, the payback has to be loan repayments from the borrowing entities. Are the local governments going to be allowed to default? Are there are teabaggers in the Chinese ministries who will filibuster the stimulus package with aid to the local governments or the bailouts to the Chinese banks? Looks like someone looking to encourage suckers to dump Chinese contracts on the cheap.
Not to sound indifferent to chinese suffering, but how is a downturn in China bad for anyone but the Chinese and people invested in China.
Man. I must have been undergrouind the day Chicken Little got things right. They sure cleaned that sky thing up quickly because I never noticed.
Why hasn’t the same crew been called into the Gulf? Oh, right! Obama.
Fortune cookies will now come with depressingly accurate descriptions of character flaws everyone close to you only hints at.
Wrapped around my eyes, of course.
ETA: I peeked to look at the monitor.
If you are interested in gaining some insight into the China of today, read “Lost on Planet China” by Maarten Troost; it is both entertaining and eye-opening. As another friend with extensive China experience told me, there are 2 religions in China: (1) nationalism, and (2) consumerism; Troost’s book does a fabulous job of showing how these 2 attitudes, combined with the barely contained seething chaos of conversion to a market economy, make any old assumptions about China totally obsolete. It’s one of the best books I’ve read this year.
@Omnes Omnibus: you need the Joo Janta 200 Super-Chromatic Peril Sensitive Sunglasses for that, though the towel is a good thought. God’s final message to his creation and out!
@Omnes Omnibus: Unfortunately, what you are facing is not a ravenous bugblatter beast of Traal.
I respect that, and it’s a group blog. However, after following very closely for months last year, I saw the paranoid libertarian/irrational side take over and eclipse the smart and entertaining writing that existed for some time.
@Sentient Puddle: Isn’t it?
Well there are a billion Chinese, so that is a large chunk of suffering. I don’t see a Chinese downturn spreading to other countries though. They’re more an exporter than an importer.
David in NY
“Why should we not be scared by this news?”
Because nobody who knows about this stuff seems to be. Or even to have thought it worth discussing. Wake me up when Krugman or somebody else reputable says its a problem.
@jeff: They started going full on crazy around the time that one of them got outed.
About 3-4 months later I started worrying for my sanity if I kept reading all that nonsense they kept spewing to try and find the enlightening information.
This was right around the time they broke the HFT story as well.
Some of the commentariat on Zero hedge certainly is unhinged, Tyler is bound to attract that crowd, I ignore anything that contains the words Gold Standard, anyone wittering on about Precious metals, etc. A Large chunk of Tyler’s readership is exactly the same set of lunatics (day traders) who helped contribute to this problem. I’d say the posts do contain some useful information, but the comments are mostly useless.
well, I can think of two indirect ways in which infrastructure development would lead to cash for a local govt. 1) (works anywhere) increased tax base and 2) (as this is still China, the cash return from govt owned industries in the newly serviced areas.
Does this mean we will be getting less poison in our baby toys?
Number one, it would have to be anonymously sourced on this topic, there’s no other way to leak the central committee’s thinking with how tightly they guard information.
Second, nobody actually read the bloomberg embed, did they? Because that makes more sense. The central cmte. did shut down new municipal lending facilities in the last six months over concerns of over-building sapping the ability of the debt to ever be repaid. That plus the order to raise capital from the central commercial banks is an indication that the govt. believes there are minor insolvency risks in the system after the huge spurt in domestic credit over the last stimulatory cycle, let alone the previous fifteen year bubble. Because of course there are. It’s nothing to worry about really.
This is the best, most concise description of China I have ever come across.
::mixes Pan-Galactic Gargle Blasters for the house::
Wait – I thought you were talking about China. That sounds like another powerful country I can think of.
Apart from that HFT story, did Zerohedge get any of their prediction right?
@El Tiburon: Beat me to it–I can see my next fortune cookie:
ETA my apologies to any/all Chinese scholars
@El Tiburon: It means buyers will try and negotiate even lower prices for manf in China as the Chinese economy’s internal demand will slow and the Factory owners will be hungrier so less profit for the Factory owners.
Which means more ‘poison’ in our baby toys. But hey, the free market will punish them, amirite?
FMC, Free Market Capitalism, reminds me of the Twilight Zone episode where you got a million dollars, but only if you pushed the red button and killed an random stranger.
In FMC people will do anything for a dollar and externalize all the risk, all the while not realizing thats exactly what everyone else is doing. Its one big gamble that the weight of all the external risks from everyone elses gambles don’t come crashing down on You before you die.
“Why should we not be scared by this news?”
Much of the infrastructure spending in China fills the same role as welfare spending in the US: providing a safety net.
In the US it is direct payments to those who are unemployed.
In China it is often make work jobs and infrastructure projects that are not economically viable.
That the some of the projects may not get paid back is no more important than is the fact that those collecting welfare do not pay it back.
The Chinese government will provide subsidies to the banks making the loans to make certain they do not go under.
OT, but this seems like some completely crazy cognitive dissonance that I thought merits highlighting.
Just a day ago, Jon Walker at FDL put up a post discussing the filibuster and why it was so bad, etc. Pretty standard stuff, most of the people here will agree.
Today, however, regarding the Deficit Commission lame duck vote, he urges Congressional liberals to hold Pelosi’s Speakership over her head if she allows a vote on the Commission proposals. I don’t see much of a difference between a Senate rule that doesn’t allow up or down votes vs. a party leader not allowing up or down votes.
Similarly, early in the health care debate, you had many in the FDL crew bemoaning the fact that you shouldn’t be a Democrat if you can’t stand with the party leaders on procedural votes. Yet Feingold was cheered along by these same guys for voting to filibuster financial regulation.
The Deficit Commission’s actual proposals should be irrelevant. If a majority of the House and Senate and the president want something, they should get it, and if it’s bad, well then, that’s why we have elections. But you can’t complain about how Republicans aren’t even allowing a vote on bills if you’re… not even going to allow a vote on a bill.
Checking around the bar, all eyes were on Ford Prefect. Some of them were on stalks.
I was watching the spokesman for the Silicon Valley Manufacturers Association bemoaning how in China they can build infrastructure there over night while it takes years here. Well now we know; borrow and refuse to replay.
That's Master of Accountancy to You, Pal (JMN)
The article hints at a real problem, and then blows it up. The Chinese banking system is extremely opaque (much worse than anything that existed here before the crisis) and very corrupt. There could be an enormous load of bad debts on the books, and the central bank has spent the last decade or so trying to figure out what to do about it.
One thing that doesn’t help is that the central bank is mostly run by technocrats, and the regional banks are more directly connected to the political leadership, which frequently uses them as a vehicle for pet projects, hence much of the corruption. The central bank frequently finds its initiatives to improve the system stymied by regional and national governments.
I’m a lot less optimistic about China than a lot of people I know. I have a hard time seeing a path to a continually growing economy that doesn’t start to clear away the deadwood of the state-run industries and I question how long they can manage to allow open transmission of the data that allows business and commerce (though even this isn’t all that open) while prohibiting free exchange of politically dangerous information. I’ve been saying this for 15 years now, but I do think that, at some point, there is going to have to be a choice made between continued economic growth and central political control. At this point, I don’t see the will among the party to choose the former rather than the latter.
If I were making a large scale investment and had to pick between China and India, I’d take India. Exactly the same things that make it such a headache for a business to operate in the short term are the things that make me more confident in the long term.
Because Jesus is coming. And when He gets here, he’s going to wave his magic wand and cure global warming and fill everyone’s wallets with gold and crude oil. And then he’ll make everyone white. And straight. And male. And American. And the world will be perfect. Amen.
OT: comicon looks like its a blast, now that Westboro has arrived:
I tend to pay more attention to Calculated Risk too. In the vein of things to be concerned about, CR’s been putting up some guest posts on sovereign debt that are pretty interesting. Shorter: be much more concerned about defaults by Ireland, Portugal, Spain, and Italy than dust-ups between China’s central bank and the regionals.
ZeroHedge is in the business of promoting panic,
YUP. They are always shrill.
@That’s Master of Accountancy to You, Pal (JMN): Hey man, if you take that IRS job just remember that I ALWAYS agreed with EVERY comment you ever made.
You are insightful, and always on subject.
China’s banking system is generally a mess. The banks are run by the government and if the government wants to pour money into a sector of the economy, the banks make loans.
The whole concept of credit checks, credit worthiness, etc., often aren’t the driving force behind Chinese banks making loans.
If the government says to make credit available to widget makers, widget makers get easy credit.
Chinese banks are generally saddled with very high default rates because of this practice.
If there’s something to be worried about in China, it’s the property bubble. I think the overbuilding there makes the amount of overbuilding here look like statistical noise.
@gene108: This is where this gets complicated. They can’t exactly hand out the money we owe them to prop things up. If China suddenly can’t buy our debt anymore THAT would be a good thing. We are addicts in need of our dealer cutting us off.
Yes, the Chinese economy is a bubble, but they don’t buy stuff from overseas aside from raw materials. No fools they. The property bubble in Canada bursting is a bigger concern for us. China’s upcoming recession will mean pain in Australia, who currently live like kings from selling them all their mining output. It will mean cheaper gas in the short term, something the American consumer could really use. Whatevers on the freak out.
I’ll find some links on this, when I have time, but the financial sector in China is very primitive, compared with the financial sectors in other countries, including developing economies like India and Chinese banks eat lots of bad loans, because of government policies.
China having loans defaulted at a very high rate is nothing new. The Chinese have probably factored that into whatever it is they need to do to keep their economy growing.
Sarah Palin just twitted that you have made Heartland America(tm) cry, with envy.
That's Master of Accountancy to You, Pal (JMN)
@Neutron Flux: I’ve got your name and number on file.
@gene108: Given what we’ve just been through, primitive describes an optimum banking sector. Banks running on the 3-6-3 rule tend to stay out of collateralized wall street products so complicated only five mad math geniuses on the planet can understand them.
I’m currently betting against them (the Chinese), so links are always good.