Enzio's Clock

Background

1. Sense and nonsense about China's lending statistics

Much has been made about China's recent increases in lending and money supply. Just today we read that January lending doubled on a year ago, to RMB 1.6 trillion. 

That is being used as an excuse to buy into markets, and, indeed, the market is up by around 20% since the start of the year. So - in the jargon of the Economic Clock™ - that would argue for an "excess supply of money", correct?

Yes, but that "excess" is a mirage. Bank lending may be up - but it also is blowing up:

• filling gaps. A great deal of this lending is filling the hole created by the departure of "self-raised funds" i.e. of truly private sector money that must be exiting China. Indeed, we see increasing swathes of Mainlanders here in Hong Kong, filling our most expensive shops;
• involuntary loans. Besides, banks in China are policy arms of the Central Government, and correctly so. This implies that their strong lending is of "involuntary", and not of "voluntary" nature. This implies that they have to book many loans that, in reality, are  of questionable quality, and this must result in more non-performing loans (NPLs) later on....
• ratio question. Many market bulls cite the fact that that the NPL ratio is falling: this implies, so they suggest, that loans are healthier. Not so fast: the volume of loans also has risen five fold, from RMB 6 trillion in 1997, to RMB 30 trillion at the end of last year. So the fact that the NPL is falling  has to do more with the fact that the denominator in this equation - loans - has risen strongly;
• measurement. another point regarding the NPL ratio is that NPLs are under-reported. Loans are rolled-over to avoid appearing to be in default, and collateralized loans are allowed to be overdue for a whole year before being binned as "non-performing".

2. How to Save Money Off This Idea

1. Always consult your financial adviser first.
2. Avoid Chinese banks.
3. Avoid the Chinese stock market. We recommended a "short" ETF on 8th December 2008; year to date it is up by 3.2%. And from the market peak of 10/10/07 until now, our overall advice has reaped gains of 22% for our subscribers, as we will discuss in tomorrow's updated Advice Tracker.