News Stories

[SaintessHeart]

Analysis: China's ailing bad debt market cries for change

(Reuters) - Veteran investor Jack Rodman has had enough. After waiting 11 years for China to sell its rising pile of bad bank loans, he is quitting and going to Spain instead.

His pull-out exposes a pressing failing in China's booming financial sector: it does not properly dispose of a growing store of bad loans from banks' profligate lending, keeping risks pent up within the world's second-biggest economy.

And the problem only scratches the surface of deeper troubles plaguing China's banking industry, where heavy government intervention has produced a dysfunctional system that is at times better at destroying capital than creating it.

The frozen market for bad loans shows just that.

For years, China has shuffled bad debt that was run up by big state firms between state banks, other state companies and Beijing in labyrinthine deals that hid the cost of bad banking, and shielded un-viable state enterprises from bankruptcies.

These losses lurk in the system unaccounted for, tarring banks' and China's fiscal health, and frustrating those such as Rodman who say Beijing quashed the bad debt market by refusing to sell dud loans openly to protect state firms from creditors.

"I've gone to Europe because I recognize that China is never going to come honest and play fair with its non-performing loans," said Rodman, who runs his own investment firm Global Distressed Solutions after working for auditor KPMG for 37 years.

"China should have a real process (when selling bad debt)where it lets accountants, regulators and rating agencies in, which they don't do."

The broken system may soon come home to roost. The debt debris is growing as China's economy confronts its slowest growth in a decade. Three of its four biggest banks reported rising bad debt losses last month.

China has to clear the debt mess sooner rather than later if it wants to free up its financial markets by 2020. And it won't be cheap or easy.

The last time Beijing cleaned up its banks and rescued them from bankruptcy, it took three broad waves starting in 1998 and ending in 2005, required huge capital injections and bad loan transfers to specially created asset management companies.

The Bank for International Settlements estimates 20-24 percent of 2004 GDP was pumped into the banking system, in one of the biggest bank rescues in history.

Such colossal government spending not only hurts state coffers, it risks fuelling inflation unless the central bank takes counter measures to soak up the extra cash.

Yet China's problem of bad loans is not likely to go away anytime soon. Its state banks still lend on the orders of their political masters in state firms and local governments.

"The next few years will see heightened economic and financial turbulence in China with the banks at the centre of it all," said Diana Choyleva, director at Lombard Street Research.

"On the face of it, since 1998, the Chinese authorities have reformed the banks. But fundamentally, they didn't change anything. Banks remain puppets in the hands of the state."

China's banking regulator reported 1.05 trillion yuan ($167 billion) of nonperforming loans in the banking system at the end of 2011, larger than the size of New Zealand's economy.

Despite the eye-popping sum, some analysts say it is probably understated as frenzied bank lending after the 2008/09 financial crisis, including 10.7 trillion yuan of loans to local governments, likely left a wave of sour loans in its trail.

COMING HOME TO ROOST

The fastest way for China to recoup losses is to sell dud loans to investors, except that it can't.

Its market for bad debt, started in 1999 by Beijing when it bailed out its banks, was decimated in the mid-2000s by what investors described as extensive government interference that chased away buyers and saddled the state with steep losses.

China recovered only 21 percent of some 1.4 trillion yuan of bad loans it sold after removing them from its top four banks in 1999, an abysmal record next to the 60 percent recovery by the United States during its savings and loans crisis in the 1990s.

Investors say Beijing only has itself to blame.

It drove buyers away by setting minimum bid prices for bad loans on auction, protected state borrowers from creditors, and enforced murky regulations, typified by a court ruling against UBS in 2009 that obstructed payment collection, they said.

"They are supposed to sell (bad loans) at auction at market clearing prices. But they didn't like prices that investors were paying because investors were realizing these things are really crappy and these borrowers are really dodgy," said Rodman.

From a crowd of over 30 foreign investors including Goldman Sachs (GS.N) which gathered following China's first-ever bad loan sale in October 2002, only a handful of small investment houses remain today, lamenting a market that never lived up to its potential as one of the world's biggest.

Making matters worse, investors say the four state-owned Chinese sellers of bad debt, known locally as asset management companies (AMCs), are reluctant sellers.

"What the AMCs did was to hang on to more of the non-performing loans themselves," said Ted Osborn, head of business recovery services for PricewaterhouseCoopers in Hong Kong.

"I think initially people were worried about working themselves out of a job. If they sold all their non-performing loans, whether to foreigners or domestically, or worked them all out themselves, then they would have nothing else to do."

ROLL-OVER

Because China fared so badly in selling its sour loans to investors, it could not repay some 1.2 trillion yuan worth of bonds it issued to buy the bad debt carved out from banks to recapitalize them, analysts said.

Pressed for a solution, China decided to roll-over all the bonds for another 10 years when they matured in 2009, sweeping bad debt losses under the carpet.

The mound of rolled-over bonds sit on the books of Chinese banks right now, leaving lenders still exposed to bad loans that should have been disposed in Beijing's 1998-2005 clean-up.

Investors say roll-overs buy China time in dealing with its debt woes, but fail to tackle the crucial question of who ultimately pays for bad loan losses.

And analysts say roll-overs are hardly the solution China needs for its bad debt: attacking the source of sour loans by shutting down unprofitable state firms, and restraining the state from using lenders to bank roll all projects.

But these are politically difficult decisions which Beijing likes to put off for as long as possible. In a repeat of history, it ordered banks to roll-over or restructure troubled local government loans this year.

"It's a crying shame that the country with the largest amount of NPLs, probably in the world, is paying so little attention in trying to resolve the problem," said a distressed asset investor in Beijing who declined to be named.

Debts. Lend at high interest rates if you want to make money, don't lend at high interest rates if you don't want defaults. Maybe we should pity the banks more. [/sarcasm]

[Vexx]

Originally Posted by SaintessHeart

Analysis: China's ailing bad debt market cries for change



Debts. Lend at high interest rates if you want to make money, don't lend at high interest rates if you don't want defaults. Maybe we should pity the banks more. [/sarcasm]

Truly a facepalm moment.... and then we take a bat to the banksters. The thing is you can *make money* at reasonable interest rates -- you just don't make AS MUCH money. It is that lack of internal brake system... the same broken brain bit that should tell one "if I catch the fish faster than they can reproduce, it will be bad".

[GDB]

Originally Posted by Vexx

It is that lack of internal brake system... the same broken brain bit that should tell one "if I catch the fish faster than they can reproduce, it will be bad".

You're so short-sighted! If you catch the fish faster than they can reproduce, then you have two choices. Saturate the water with fish viagra, or switch to crabs.

<insert in case obvious sarcasm isn't detected>

[SaintessHeart]

Originally Posted by Vexx

Truly a facepalm moment.... and then we take a bat to the banksters. The thing is you can *make money* at reasonable interest rates -- you just don't make AS MUCH money. It is that lack of internal brake system... the same broken brain bit that should tell one "if I catch the fish faster than they can reproduce, it will be bad".

The ironic thing which added fuel to the fire, is that when you suddenly raise interest rates, people borrow more for fear that interest rates will rise again the the future. The even better thing that in China, the banks are lending money to "state companies" which are making losses, simply on the premise that they are state-owned/related companies (or at least what it looks on paper). Looks like the USSR in the late 1970s to the early 1980s all over again.....where the "peasants" queue for bread and their leaders wait to be served with caviar sandwiches.

How about denying loans to people buying cars, or those buying luxury houses?

[GDB]

Originally Posted by SaintessHeart

The even better thing that in China, the banks are lending money to "state companies" which are making losses, simply on the premise that they are state-owned/related companies (or at least what it looks on paper).

Clearly sustainable.

[SaintessHeart]

Originally Posted by GDB

Clearly sustainable.

If the money goes where it is supposed to. Not sure if it was right to put money into the private Mercedes of the official owning the company company required vehicles, silver and gold signature pens for every crony executive in office office supplies, gala dinner serving cereal tiger prawns and abalone and shark fin company cohesion events, ghost workers quality control department and leadership salaries.

[Sumeragi]

I wonder how much of the loans given to non-state actors are nonperforming because the actors who got the loan just refuses to pay despite having the money, and are relying on bribes and guanxi to continue not paying?

[LeoXiao]

It's a bad sign when my minor is economics and I still don't really understand much of what that article is talking about.

[Bri]

Originally Posted by LeoXiao

It's a bad sign when my minor is economics and I still don't really understand much of what that article is talking about.

You shouldn't, the article has little to do with economics, it's more about Finance aka the Dark Arts

[Xellos-_^]

Originally Posted by Bri

You shouldn't, the article has little to do with economics, it's more about Finance aka the Dark Arts

which is why he should know it.

[Ithekro]

No one ever understands the Dark Arts....not when you can't keep even one teacher around for an entire year.

[flying ^]

Originally Posted by SaintessHeart

Analysis: China's ailing bad debt market cries for change



Debts. Lend at high interest rates if you want to make money, don't lend at high interest rates if you don't want defaults. Maybe we should pity the banks more. [/sarcasm]

<----- here's someone hoping mainland China will be humbled someday (hopefully in a couple years) like Japan in the 90s and ASEAN peoples like vietnam/phils will breath sigh of relief knowing that status quo will remain.

[Vexx]

Originally Posted by flying ^

<----- here's someone hoping mainland China will be humbled someday (hopefully in a couple years) like Japan in the 90s and ASEAN peoples like vietnam/phils will breath sigh of relief knowing that status quo will remain.

Remember how people used to try and buy "made in USA"? These days I'm happy if it says "made in Vietnam/Cambodia/somwherebesidesChina". Not that I'm against the Chinese but the market isn't served well by a source monopoly.

Now, if I could buy directly from the Viet/Cam/etc's website and not have to pay a 400% markup ala Macy's *that* would be "globalization" for the consumer.

[Elestia]

Originally Posted by Vexx

Remember how people used to try and buy "made in USA"?

Reminds me how US manufacturers had terrible product quality during the the 1950s. The US screwed themselves after WW II when voracious wartime demand had evaporated. Quality in the US was terrible, the numbers of defects or errors in US products were astronomically high compared today's standards. Even in the movies about WW II you can see reference to equipment breaking down on the battlefield, which served as reference to US quality standards. Rather than focus on the implementing a strategic quality control to improve their processing stages they stuck closely to quantity over quality. While it might have been useful during times of war, the industry refused to change their practices after the war was over. People like Deming, Crosby, and Juran had several methodologies to improve quality for the industry, but rather than listening to the men they stubbornly dug in their heels and stuck to their way of mass-production. This forced Deming and the rest to pitch their ideas overseas to the Japanese. Toyota was one of the earliest adopters of the Demings, Juran, and Crosby's teachings to implement statistical tools and methodology. This led to increase focus on quality control in the manufacturing process as well as improve productivity, lower cost, and eventual adoption of lean manufacturing. The Japanese concepts of quality through continuous improvement or "Kaizen" became the de facto strategy to achieving global recognition in the world market. This is why Japan was a huge exporter of electronics and automobiles during the next half century.

[Vexx]

Originally Posted by Elestia

... Deming ...

If I had to soundbite your great post... the US turning its nose up at Deming pretty ensured a spiral of doom. The Japanese were "raising all boats" (both employees and employers) with his notions. It was only when the Japanese started adopting "modern US corporate" abusive practices that they fell into their 90s "pit of despair".

[flying ^]

donations pour in to Z-man's defense

$200K and counting...

http://www.tampabay.com/news/website...efense/1227160

[ganbaru]

U.S., Japan unveil revised plan for Okinawa
http://www.reuters.com/article/2012/...83Q03M20120427

Hague court convicts Taylor of crimes in Sierra Leone
http://www.reuters.com/article/2012/...83P0J720120426

[Dextro]

Originally Posted by Endless Soul

Interesting.

I was at Fry's (a U.S. west coast based super electronics store) a few months ago and my friend and I wandered near the TV section. They had a side-by-side demonstration of HD vs. non-HD TV screens. Both were over 50" wide, both were from teh same manufacturer, but one was HD, the other wasn't. The display was set up to play Battle: Los Angeles simultaneously. The regular TV looked as it would when viewed at the theater. With the HD TV, the effects looked fake, and were quite obvious. It looked really bad. Like Galactica: 1980 bad.

HD might be fine for sports and whatnot, but I don't think it works so well for movies.

By the by, if you've never been to a Fry's you should go. They're...interesting.

Endless "Dr. Zee" Soul

HD works for movies and so does 4K (basically 4 times the current "HD" resolution") but there's a catch: you can't budget special effects for an HD release like you would an old SD one, it'll just look cheap. So far the movie and tv industries have gotten away with a lot of shortcuts in the special effects from painted backgrounds to cheap makeup that would be good enough for the low resolution devices people used to watch the end results but now they don't work anymore and they have to up the game.

[SaintessHeart]

Originally Posted by LeoXiao

It's a bad sign when my minor is economics and I still don't really understand much of what that article is talking about.

Thank goodness. At least you didn't absorb any of the 50-50 stuff most economics classes teach nowadays.

[konart]

Four blasts within minutes rocked the center of the eastern Ukrainian city of Dnipropetrovsk

http://www.kyivpost.com/news/nation/detail/126746/

PS: now it's already six or eight