China’s Growing
Economic Miracle… Cracks and Bubbles?! Realties of China’s Banking and Finance
China Banks Fail Day American Activism Died Hollywood MSM What Is An Oligarchy? Documented Government Black Ops Artificial
"Impeachment" Analysis Zionism
Unmasked
Global Research, January 16, 2020
Region: Asia
Theme: Global Economy
In emulating the American economic
raison d’etre, China has attempted to develop
its unique capitalist model while ignoring that it too will soon suffer the
same fate for the same reason: Unsustainable debt. When examining
the recent realities of Chinese banking and finance over the past year it seems
the steam that president Xi Jinping touts as powering the engine of his
purported economic miracle of a master-planned economy is only a mirage, now
almost completely evaporated before his eyes.
Like the many other similarly foolish
western nations, China seeks only one path out of this fiscal death spiral, one
that will likely spell doom and/or revolution in many countries soon: More debt.
China is becoming increasingly unable
to continue to pay into the base of the world’s largest pyramid scheme of an
economy and the cracks in the bubble are showing. This past year, saw three of
the 4,279 Chinese lenders almost fail, if not for the massive intervention by
the People’s Bank of China (PBoC) of immediate
liquidity via more debt. The Chinese economic miracle is built on unsustainable
debt-based infrastructure projects over the past two decades that have provided
China with a face of prosperity to show the world, but this is only a mask to
hide the limited countrywide success of the Chinese miracle into the rural
areas. The injection of $Trillions in capital has seen China distribute these
sums across the base of its economy creating a GDP that hit a high of 14.2 % in
2007 then averaged nearly 9% for the next decade before dropping yearly to 6.1%
in 2018. All this growth had produced a personal affluence to a sub-set of
Chinese society that has stoked this appearance of a flourishing economy.
This Chinese economic Keynesian trick
of interjection of liquidity into national infrastructure is somewhat similar
to the TVA and national works projects funded under Roosevelt’s depression-era
New Deal. In this approach employment and therefore a growing tax base
accelerated year after year as workers and corporations received the
short-lived benefits of this massive windfall of available liquidity.
China’s method of stimulus is of course
distinguished from today’s American model that merely shovels the injection of
its own manufactured $Trillions by using multiple fiscal tricks to by-pass the
citizenry and instead shovel the cash straight into the wallets of the already
super-wealthy. Meanwhile, the US peasant once again pines in the “Hope”of yet another
election.
The Metrics of a Failing Economy
Many analysts have for nearly a decade
opined that China’s belief in national fixed-asset investment, the biggest
engine of China’s economy, has long been the fundamental contributor to Chinese
GDP growth, which was directly proportional to an ongoing increase in public
and private debt. “China has relied on export and debt-financed fixed asset
investment for growth for over two decades,” said Ho-Fung Hung,
Professor in political economy at the Johns Hopkins University.
But as the world economy slows while
the metrics show a recession looming China’s economy is already cooling
rapidly. “And as the central government and banking system keeps producing
new loans to absorb the debt, it leads to the continuous debt buildup,” Maximilian
Kärnfelt, an analyst with the Berlin-based Mercator
Institute for China Studies, told news service DW, adding that infrastructure
investment still largely drives China’s economic growth since fixed investment
contributed to 45 per cent of China’s GDP in 2016.
In a sign of the disaster to come, the
first Bank to almost fail was Baoshang Bank Co. in May 2019. In this
instance, for the first time in twenty years, the government took over control
and seized the bank. This progression next took form when Chinese regulators
took a different approach by ordering three state-owned financial institutions
to buy significant stakes in Bank of Jinzhou Co. When, Shandong-based Heng Feng
Bank, which had failed to disclose its financial statements for two straight
years, required a bail-out, the bank sold new shares for about $14
billion to a group of investors including a unit of China’s public
sovereign wealth fund and a local government-backed asset management firm.
Although these were some of the smaller
rural banks, as shown this past month in Chinese reports, their economy is
following the world in a quantified slowdown that has seen GDP slip yearly
since 2012. Making the matter worse a similar world slow-down in purchasing is
already affecting China’s manufacturing-based economy. The three bank failures
were only the tip of a huge iceberg.
China’s $40 Trillion banking system
dwarfs the American system at double the size, with over 4,000 small, medium
and massive, state-owned banks. The world’s four largest banks, including
behemoth ICBC ($4TN), are all Chinese.
The failure of just three banks was
important enough that Chinese regulators submitted Chinese banks to a stress
test and the results were shocking. China’s central bank admitted that China’s
banking sector is “showing signs of strain.” The stress tests had
revealed that over 13% of China’s 4,379 lenders were designated “high risk”
by the central bank’s report. With this amounting to over 570 banks, and thus
multiplied by the three existing examples of bank bail-out funding, with the
Chinese economy following the world into recession, the financial numbers and
likelihood of any future series of bail-outs are truly biblical. If not, fiscally
impossible.
Separately, the PBOC also stress-tested
30 medium- and large-sized banks in the first half of 2019. In the base-case
scenario, assuming GDP growth dropped to 5.3% – or well
above where China’s real GDP is now – nine
out of 30 major banks failed and saw their capital adequacy ratio drop to
13.47% from 14.43%. In the worst-case scenario, assuming GDP growth of
4.15%, or just 2% below the latest official Chinese GDP report, seventeen
out of the thirty of these major banks failed the test. Separately, a
liquidity stress test at 1,171 banks, representing nearly three-quarters of
China’s banking sector by total assets, showed that ninety failed in the
base-case and 159 in the worst-case scenario. The metrics of any collective
bail-out indicates that China has upwards of an insurmountable $20
trillion problem rapidly approaching.
In reaction to these first three bank
failures, the stress tests and poorer economic news China did what centrally
planned economies do: Chinesepolicymakers focused on
strengthening oversight and regulation by the PBoC
and gave it authority to write new rules for much of the financial sector. The
China Banking Regulatory Commission and the China Insurance Regulatory
Commission will
now be merged as part of an overhaul aimed at resolving existing problems
such as unclear responsibilities and cross-regulation as well as closing
regulatory loopholes and curbing risk in the $40-43 trillion (€34.78 trillion)
banking and insurance industries.
With the metrics of China’s banking
system already pause for considerable concern to the tune of $20 Trillion, this
huge obligation is as much a mirage as the economy since it fails to add to the
account the very large and un-tabulated Shadow Banking loans which would add
$Trillions in debt to China’s already highly leveraged systemic banking risk.
The International Monetary Fund (IMF), which provides- despite its
predatory legacy- some excellent yearly analysis of worldwide economic
developments has warned China’s problems could lead to “financial
distress” in the world’s second-biggest economy. China is seen as one
of the economies most vulnerable to a banking crisis, although Beijing has
repeatedly assured that the risks
are under control. In response to the PBoC
reports, Chinese Finance Minister Xiao Jie
echoed that the situation “was under control.”
How to Pay for It
All: Central Banking Asia Style
China’s Economic Tricks of
Sustainability
As the world economic body politic runs
out of any remaining gas to keep a pilot light under the rapidly cooling
metrics that show their long forestalled recession is near and certain, China
is also contracting.
The national debt of China, which is
the total amount of money owed by the Chinese government and all organizations
and branches stands at nearly CNY 38 Trillion ( $5.4 TN) and 54.44% of GDP.
Chinese debt has been accumulating ever
more rapidly. The Institute for International Finance (IIF) reported that
year-on-year, in Q1 of 2019 China’s corporate, household and government debt
increased 6% more from 297% of GDP to an incredible 303%. However, this is also
more than a 100% increase since 2008 and amounts to 15% of all global debt.
These figures do not include the
off-the-books “Shadow Banking loans that some estimates predict would triple
that debt percentage to much closer to $16 Trillion. The problems are most
serious in China’s rural banking sector where an ever nervous public has
reacted with two late-2019 bank runsat China’s Henan
Yichuan Rural Commercial Bank and then at Yingkou
Coastal Bank.
At the end of 2018, the budget deficit
of the Chinese government was close to five per cent. However, if the
off-balance-sheet (“shadow”) financing of local governments is taken into
consideration, the budget deficit rises to over 11 per cent. However, at the
end of 2014, the official government deficit stood at less than one per
cent, but an accounting which includes local “shadow” funding was around five
per cent.
China’s shadow banking system is
so-called since this myriad of endemic lending trickery is believed to be
massive in total and kept off the books. These risky, undisclosed loans entered
China’s financial system in 2009 throwing open the doors to debt for a Chinese
population hungry for investment in order to pay for all those Chinese and
internationally made western goods.
The main kind of shadow deposit is
generally offered as a wealth
management product (WMPs). Chinese banks offer these via aggressive
marketing of high-interest-rate accounts as their alternative to savings
accounts which are regulated to a maximum return of 3 %. Since these sanctioned
shadow loans advertise a return of as much as 8% or more, normal banking
customers have been throwing their miraculously large paychecks into these
funds by the billions.
One reason WMPs offer higher rates is
that they are based on much riskier bank loans, much like the precursor to the
late ’80s, early ’90’s American savings and loan meltdown. Incredibly, banks
don’t hold these loans on their balance sheets or set aside capital against
their potential defaults. Instead, they typically extend this debt via
intermediaries called trust companies—firms that are not allowed to accept
deposits or formally loan out money but are allowed to manage it. The trust
companies create investment products like WMPs, which banks market for them in
return for a commission.
With some smaller Chinese banks having
already found themselves either getting bailed out or the subject of a bank
run, one reason is that, like America, China’s interbank/repo rates have surged
amid growing counterparty concerns of the many banks seeking depleting
available liquidity. This has forced many banks to rely almost entirely on new
deposits to fund themselves, forcing them to hike their deposit rates to keep
their funding levels stable. Like any Ponzi trick in banking, new cash is
required to sustain these thousands of lending pyramids. With the economy in
decline, this need has lead to some desperate
regional banks offering incentives for depositor’s cash that would make the
long-ago American “free toaster”seem ordinary.
China has a massive pork famine that
has seen disease wipe out 40% per cent of its pig population in 2019. With China
being the world leader in pork consumption these bank’s desperations have
created some interesting incentives to attract depositors. The SCMP
reports that new clients who deposited 10,000 yuan (US$1,430) or more
in a three-month time deposit at the Linhai Rural
Commercial Bank in Duqiao in Zhejiang province were
then eligible to enter a lottery to win a portion of pork ranging from 500
grams (18 ounces) to several kilograms.Other rural
commercial banks in northern China’s Hebei province and western China’s Guizhou
province have also launched similar pork rewards programs. Dushan
Rural Commercial Bank, located in the remote mountainous county in Guizhou,
offered a coupon for 10 yuan (US$1.4) worth of pork for every 10,000 yuan of
new deposits.
This solution has been touted as
uniquely beneficial to these banks since,instead of
offering higher rates which only accelerate the bank’s insolvency due to
requiring higher payouts on deposits, the bank is instead making a one-time
payment, and the unusual incentive is enough to garner substantial new
deposits.
PBoC cuts in its key lending rates in
August ’19 designed to stimulate a slowing economy have only exacerbated net
interest margin pressures on these banks. With less income from returns on
their loans and without the many funding options available to China’s much
larger banks, these increasingly high-interest rates that China’s smaller banks
have to offer in order to attract new cash deposits could further lead to their
insolvency.
It’s been over four years since the
last official Chinese benchmark rate cut. With America leading the way across
the globe with rate cuts aplenty and China still having a base rate of far
higher than the US rate of < 1.5%, it was only a matter of time for China to
also drop rates.
With the new authority given to the PBoC, this key Loan Prime Rate (LPR) has become the new
Benchmark Reference Rate to be used by banks for lending. This, like most
recent decisions are designed to interject further liquidity in the form of
debt once again into a still failing economy by lowering borrowing costs for
small businesses. This rate will be now set monthly (20th of every month) and
will be linked to the Medium-term Lending Facility rate. The current 1 year LPR
stands at 4.15% after its latest cut on Nov 30 versus the Benchmark Rate of
4.35%. This number is sure to continue to shrink and can be considered a key
indicator of Chinese frustration at retaining needed annual GDP growth since
the result of this one move lowered the costs of the roughly 152 trillion yuan
($21.7 trillion) in yuan-denominated outstanding loans held by financial
institutions (that are actually on the books) in a further hopeful attempt to
again boost economic growth.
Just mere days after the 20 bps cut the
PBoC further highlighted its desperate need for
capital, announcing that it will be lowering the required reserve
ratio (RRR) – or the amount of money banks are required to have on hand – by
50bps for commercial lenders. Currently, the required reserve ratio is 13%
for large banks and 11% for small banks. The cut, which is the first
since September, will bring the blended reserve ratio for Chinese banks
to the lowest level since October 2007. In doing so PBoC effectively released about 800 billion yuan ($115
billion) in instant liquidity from out of the already cash-strapped financial
system.
All these adjustments by China and the PBoC do little to control or pay-off increasing debt and
are designed to maintain the Chinese miracle of TVA style infrastructural
improvements that has been the employment engine of its economic growth.
China’s new development of the Belt and Road Initiative (BRI), although a
masterstroke in Eurasian commerce, also serves to continue the illusion.
As traditional monetary policy becomes
ineffective to boost the economy, Chinese President Xi has installed
twelve former executives at the state-run financial institutions across the
country who will support the communist government’s ability to combat banking
and debt difficulties, reported Taipei
Times.
These appointments are in response to
growth collapsing to a three-decade low in 2019. New manufacturing orders did
increase but this was in large- and medium-sized enterprises. Small
enterprises continued deeper into contraction and new non-manufacturing orders
slowed, pushing employment further into quantified contraction.
An easier to understand recessionary
metric, passenger car vehicle sales, fell yet again in December, plunging 3.6%
to 2.17 million units, according to the China Passenger Car
Association. This marks the 18th drop in the past 19 months for the country.Sales fell 7.5% in 2019 and 6% in 2018. GM
said that its sales were down 15% in China and said that pressure into
2020 would likely continue.
Meanwhile, local Chinese manufacturers’
numbers are also down. BYD Co. posted an 11% drop in 2019 sales and SAIC Motor
reported a “similar decline”.
Worse, exports to the United States
were down 23% from the prior year.
Running from the Piper’s Call
But, it seems that China has no choice
but to carry on with the façade of financed infrastructure projects as the only
path to survival. Said Victor Shih, an associate professor of political
economy at the University of California in San Diego:
“Because it [infrastructure investment]
already is a large contributor to growth, the slowing investment will
substantially reduce growth rates. This is not what the leadership wants.”
Shih’s assertion seemed confirmed when
last year, President Xi said Chinese banks would lend 380 billion yuan ($55.09
billion) to support Belt
and Road cooperation, and Beijing would also inject 100 billion yuan into a
Silk Road Fund. Some observers view the project as an instrument designed to
help the Chinese economy, with state-owned companies in specific sectors
expected to profit massively from its implementation.
But they still need funding and Chinese
banks on their own volition may be reluctant to get involved when already
having troubles of their own. Andrew Collier, managing director at Orient
Capital Research, says
“The banks [may] remain leery of these
projects because they doubt they will be profitable and they will be stuck with
bad loan. In the end, we are going to see increasing defaults among smaller
institutions, the collapse of private loans via wealth management products, and
growing layoffs in areas of the country with less political power.”
Making matter worse, a study conducted
by the Center for Global Development estimates that the initiative could
increase debt sustainability-related banking problems in eight countries also
involved in the BRI.
“I still think that if growth
falls below a certain level, the top leadership will order a stimulus, which
involves acceleration in debt growth,” said
Victor Shih. “That is the only viable tool in China’s arsenal if the economy
slows too much.”
As noted in a recent article by
University of Helsinki economics professor Tuomas Malinen, China has stimulated its economy
aggressively in Q1 and Q3 2019 but interestingly has not continued its past
emphasis on infrastructure investments as in 2015/2016. Q3 of 2019 saw
record-breaking stimulus programs, however, China concentrated instead on providing loose credit to
enterprises through both conventional and “shadow” banks.
As Malinen
forewarns:
“What is notable is that even with this
record stimulus, China has kept its economy growing barely above the ‘official
rate’. This
tells us that the Chinese economy has reached or is very close to reaching the
point of debt saturation, where households and corporations simply cannot
absorb any more debt, and any new debt-issuance fails to stimulate the
economy.”
Though a massive
infrastructure-spending program could revive growth, the ability of China to
issue fiscal stimulus is starting to be seriously limited. This effectively
means that China is fiscally unable to underwrite massive infrastructure
projects and so any new world-economy-saving stimulus from China, as in
2015/2016, will be practically impossible. New infrastructure initiatives-
if recessionary metrics continue to deteriorate- could only be realized if
those costs are directly monetized by the PBoC. This
would be the weapon of last resort for China but , when considering a declining
economy, may soon be inevitable.
As Goes China…?
China is just one more working example
of the failure of the many globalist economies worldwide that are already
similarly suffering in the grip of massive unsustainable- if not orchestrated-
debt. Which country becomes the first to trigger the almost certainly pending domino
effect of global economic collapse, is merely a rhetorical question at this
point. As goes China…?
This
week in an interview, former Reagan OMB director David Stockman highlighted
the global economic link to China, saying,
“The world economy would be not nearly
as good as it looks had the Chinese not been borrowing like there’s no tomorrow
and building regardless of whether its efficient or profitable.”
Stockman added, in summation,
“The whole global economy is really
dependent on China piling even more debt onto the $40 trillion pile they
already have.”
China economically continues to play
the financial role of Kenneth Lay to its American mentor’s Bernie Madoff. But
in the last few months China has shown, like so many other so-called first
world economies, that it too is now all-in at the casino and using only
borrowed money in a desperate effort to stay at the table…or starve.
Worldwide, many countries already burn
in political turmoil of their own debt-ridden making as their own primal
forces of nature squeeze their populations with the resultant new mantra of
ever increasing austerity while the IMF and World Bank waits in the wings,
salivating to gobble-up the carcass.
Alas, when it comes to unsustainable
national endemic debt one primal truth is now being heard clearly in China, as
in other Central bank boardrooms across the globe, and the empty dinner plates
of their public…
When the time comes to pay the piper,
that debt willbe paid, no matter…but the Piper
will take, in lieu of payment, pork, flesh, blood, or… dreams!
(Special thanks to Tracy Turner for
providing additional research for this article.)
*
Forward this article to your email lists. Crosspost on your
blog site, internet forums. etc.
Brett Redmayne-Titley has published over 180 in-depth articles over the past ten
years for news agencies worldwide. Many have been translated and republished.
On-scene reporting from important current events has led to his many multi-part
exposes on such topics as the Trans-Pacific Partnership negotiations, NATO
summit, Keystone XL Pipeline, Porter Ranch Methane blow-out, Hizbullah in Lebanon, Erdogan’s Turkey and many more. He
can be reached at: live-on-scene ((at)) gmx.com. Prior articles can be viewed
at his archive: www.watchingromeburn.uk
The original source of this article is
Global Research
Copyright © Brett Redmayne-Titley, Global
Research, 2020
China Banks Fail Day American Activism Died Hollywood MSM What Is An Oligarchy? Documented Government Black Ops Artificial "Impeachment" Analysis
China Chinese China’s Banks Economy
Debt Bank Banking Growth Economic
China’s Growing Economic
Miracle… Cracks and Bubbles?! Realties of China’s Banking and Finance