Debt, deleveraging and defaults in China

If not shadow banking, it is shadow lending, anyhow:

Insurers are allowed to allocate up to 55 percent of total invested assets in alternative investments. Those investments accounted for 40 percent of invested assets in 2017, but the number has risen sharply in recent years. In 2012, the proportion was 9 percent.

Of the 40 percent recorded in 2017, the largest proportion was in debt investments, where the funds mostly end up as loans to infrastructure and real estate projects, Reuters analysis of insurance asset management product data shows.

In the three years to the end of 2017, insurers’ investment in loans for infrastructure nearly tripled and nearly doubled for real estate. [Link]

Private sectore defaults:

Earlier this month a private Chinese manufacturer, DunAn Group, sent a letter begging the Chinese government to help it out with its $7 billion of debt.

“If a credit default happens, it will deliver a serious blow to many financial institutions in Zhejiang and may even cause systemic risks,” said DunAn’s letter, according to the Financial Times. The letter also blamed the company’s troubles on China’s tepid effort to tighten credit conditions and rein in corporate debt. [Link]

Private corporate defaults in general, up more than 30% in the first four months of 2018:

China’s private sector firms are facing a debt crisis amid falling profits and rising financing costs, with the value of bond defaults in the sector rising by more than a third in the first four months of the year, according to industry watchers.

More than 10 companies, several of them listed, from a variety of industries have defaulted on 15 bonds worth more than 12.8 billion yuan (US$2 billion), according to figures from China Central Depository and Clearing Company, which manages and promotes the sector.

The spike in defaults has unsettled regulators that have been keen to prevent systemic risks as they seek to reduce national debt levels. [Link]

Debt addiction has not really been kicked but bank lending somewhat rationalised:

Here’s a widely told yarn: Last year China successfully curtailed skyrocketing debt issuance without hurting growth…. For investors watching the Chinese economy and rates, the message is clear: China hasn’t somehow magically cracked the code on debt-free growth. If industrial profits and inflation keep heading sharply lower, expect another round of substantial stimulus before too long. [Link]

Therefore, this should not come as a surprise at all:

In a speech made in the Chinese capital, Xia Bin, who has been advising the State Council – China’s cabinet – on financial policy since 2009, painted a far less rosy picture of the country’s financial industry than the one presented by Beijing.

“Systemic risks are elusive and spread fast” in China, said the 67-year-old, who was a key figure in a clean-up campaign of non-banking financial institutions two decades ago, when he was a senior official at the People’s Bank of China.

Beijing must remain alert to the threat of a financial crisis, he said, adding that government indicators did not reflect the true dangers.

China’s official non-performing loan ratio, for instance, bore little resemblance to the true figure, he said.

“From a dynamic perspective, it should be beyond [the official figure of] 2 per cent.”

Similarly, banks’ exposure to the property market was far higher than official figures suggested, he said. Official numbers say that about a quarter of all outstanding bank loans are linked to real estate, but Xia said the real figure could be as high as 80 per cent if all loans that used property as collateral were taken into account.

The whole Chinese economy had been “hijacked” by property, and that had created an enormous threat to the country’s financial stability, he said. [Link]

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