China’s Shadow Banking Looks a Lot Like Sub Prime Alt-A Market
Much has been made of China’s property bubble (or not) over the last 24 months. Highlighted by Jim Chanos’ bet that real-estate in the Lone Star Country was headed not only for a major correction but perhaps an all out crash, there have been many a bet made on China experiencing something akin to a hard landing. As many readers know, we’ve been of that mind for some time.
There are, of course, reasons to be less dour. Many in China pay cash for houses, the lack of alternative investment markets and the high level of savings make up the top-three of a laundry list of reasons one might see the property market as less-assailable than that of the US in 2007. However as the PBOC continues its rate-hike policy (they remain very much behind the curve here) and the profit margins for many companies in Guangdong plummeting from 30% growth rates to (gasp) 10% we are becoming more convinced that a major first shoe is about to drop.
Sadly, the current aggregation of survey information coupled with the last two days’ explosion in Shibor suggest that it may not be time to get back in the water. Of course anyone with a fishing boat and a house on Martha’s Vinyard is welcome to join as we explore these treacherous waters.
Headlines like to capture the ultimate end cost to users of money. In a series of anecdotal charts compiled by the FT’s China Confidential, we note that pricing power eased as volumes also slowed while we worked our way through the Spring. What we will be looking at are touch points for the underground banking or lending system.
Month over month lending in the Chinese shadow banking system continues to report astounding growth numbers. Most of this is due to tighter lending and underwriting standards in the more formal channels. This suggest to us that despite their best efforts the central committee is having a tough time regulating the explosive growth in credit that now very much threatens their ongoing expansion.
The chart below shows the lending growth month over month in the “Bank-Trust Corporation” space. These non-traditional repositories for liquid assets are now growing due to the negative real rates being paid in the formal banking channels.
As interest rates have risen we are unsurprised to see these lending volumes grow. As was the case at the height of the US based lending boom, people fled the traditional mortgage originators and went to the cheapest money they could find – often coming in the form over very flimsy and opaque financial institutions.
We fear China is now experiencing the same kind of build up. But as they say, “on with the show!”
More signs that investors and those seeking liquidity are going for non-traditional sources of funding is reflected in the forward looking volume expectations.
All of the above noted, the first signs of weakness are starting to show. As if often the case in markets that are rolling over, we are seeing a true lack of forward pricing power.
And, the final chapter of this first book suggests to us that our hero – private sector lending – is very much in trouble. While delinquent loans haven’t quite lead to Maddoff like negative cash flows, the month over month increase is meaningful.
With Shibor having rocketed up to new heights over the last week, the idea of a soft landing may have evaporated along with the once tight spread. If a correction in property comes and financial institutions are impaired China will need all of the current account surplus they can find to clean up the books. They have been doing this already in failed muni loans.
Property is next. Maybe Mssr. Chanos is right…
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