China’s Lending Still Thrives

June 29, 2011

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A while back,  I wrote a post entitled “Is the Iron Fist Control of China’s Central Government Coming Unhinged?” questioning the communist governments grip over the banking system, inflation, and the military – something the consensus takes as absolute, and the left in the US admires from a far.

On the banking side, in today’s WSJ, Andrew Collier detailed the inability of the PBOC to control lending in the country. He sat down with an executive at one of the big four banks and asked about how the lending crackdown is impacting his business. “There are ways around these rules,” going on to detail how lending rules are circumvented, with the debt shifted off a bank’s balance sheet: “a property developer pre-sold homes, but still needed capital. So he pledges future personal mortgage loans as collateral, collateral that doesn’t exist.”

Another example are wealth management products, which are backed by land, and sold to retail customers. This practice was banned, but “ local bank branches have begun to arrange ‘meetings’ between corporate borrowers and their high net worth clients, with the bank providing “implicit” support for the product.” The loans never show up on the books.

Local governments are  unable to issue bonds, so they set up investment vehicles – again using land as collateral. After the central government cracked down, they turned to untraceable loans – often State Owned Enterprises, who have unfettered access to the banks.

There is no way to know how large the magnitude of China’s credit bubble, but you can guess by the size of the money supply – which is “Unprecedented in History,” dwarfs the US, and has been growing at 15-20% for many years.

 

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