A news story at MarketWatch, which is the on-line protrusion of the Wall Street Journal, has the reassuring title -“Chinese banks safe for now”. It goes on to claim that even a thirty percent drop in property prices won’t cause the Chinese banks “to break a sweat”.
Now, it just so happens that I read the stories this piece of press-release ‘journalism’ is based on. two days ago in the Chinese press. It was reported that the Chinese banks did their own ‘stress test’. This test showed how there would be no losses at all, no defaults at all even if there was a 30% drop in prices. How could such an amazing thing be true? Well, the article goes on to explain, Chinese banks require a twenty percent deposit on all houses, so everyone and everything is safe as Chinese houses.
In fact some Chinese banks reported that they would have no adverse effects even at a 40% decline in property prices. Ask someone who knows anything at all about lending, interest rates and leverage and see what they have to say about that claim.
Now let me quote yo the last line of the Chinese article this story comes from. “The results of the stress tests are contradictory to the perception that banks are taken hostage by high property prices.” You can read this as saying – so that ‘perception’ must be wrong, phew!’ Or I think you can read into it a tiny note of scepticism, can you not?
Remember these stress test were done by the banks themselves. Who of course would never lie and have nothing whatever they might be trying to hide.
So what might be going on? Again I have to remind yo I am not an insider nor any kind of China expert. But this occurs to me as something to bear in mind. A vast amount of the lending and debt in China’s banks is not directly to mortgages. It is not directly to people buying houses. A vast amount of it it to developers and is not on the banks books as mortgages but done through Special Investment Vehicles SIVs. I am willing to bet that the banks followed the letter of what they were asked to do and stress tested their actual mortgage lending. What I bet they did not do, because they weren’t asked to, was to test the robustness of their lending to SIV’s.
Had they, I think the picture would be very, very different.
I think Chines bank lending for property is about as sound, healthy and honest as a glass of Chinese baby milk formula. Melamine anyone/
Why has the Shanghai exchange been falling so rapidly? 10% in two weeks of which nearly 5% in a single day last week?
The inescapable fact, as published by the People’s Bank of China itself, is that in 2009, the Chinese government and corporate entities issued a total of 4.9 trillion yuan of new debt, a 68.5 percent increase over 2008. Half a billion pounds worth of new debt in one year.
The China bubble is convulsing like a fat man’s belly with food poisoning.
mr golem
its not germane to this thread but i post here r.e. your article a few days ago about the use of the words "core" and "periphery "
reading about something else i stumble across this
"Dooley, Folkerts-Landau and Garber have referred to the monetary system of today as Bretton Woods II. They argue that today, like 40 years ago, the international system is composed of a core issuing the dominant international currency, and a periphery. The periphery is committed to export-led growth based on the maintenance of an undervalued exchange rate. In the 1960s, the core was the United States and the periphery was Europe and Japan. This old periphery has since 'graduated', and the new periphery is Asia. The core remains the same, the United States. The argument is that a system of pegged currencies, in which the periphery export capital to the core that provides a financial intermediary role is both stable and desirable"
Andrew,
As far as it goes that picture of the world is obviously accurate. Where it is left broken is that it does not take into account the advent of a nationless, non-regulated, debt backed currency that has been issued and debauched by the banks.
I think this changes everything.
I agree there is still a core and periphery and they are tied together by currency but not the old currency. They are tied by debt export and debt and this, I believe has a quite different logic to that of the old currency pegs.
Thank you for bringing this up. I am thinking more about it now you have raised it.