China: Loans about to dive by 50%
Summary
Along with most investors, we are great believers in the China story. Indeed, even if the place is not a "democracy". her politicians are answerable to the public just the same. If they don't create 100 million jobs a year, the groundswells of social unrest could rise further. This is what makes recent news on overall bank lending a little disturbing. We walk you through it, link it to recent convulsions in Dubai, and then suggest how to protect your money during the coming squall...Topics Covered
- The problems
- Links to Dubai
- How to save money off this idea
Background
1. The problems
According to a newer report by BNP Paribas, Chinese banks may sever lending by up to 50% from last year. Their analyst, Doris Chen, reckons that "...short-term bank loans are expected to average 800 million yuan a month in the first quarter, down from 1.5 trillion yuan a month, on average, in the first three months of last year."
Ms. Chen's forecast is not totally unfounded. According to yesterday's South China Morning Post (SCMP), Central Bank Governor Zhou Xiaochuan "...told mainland media that banks must now be careful about becoming over-extended."
Indeed, next to individual banks which are about to throttle their lending, syndicated loans are plunging, too. According to said SCMP, "According to Thomson Reuters data, total syndicated loans crashed to a puny US$276 million in the last quarter - from a record US$18.7 billion in the first quarter of last year."
Here are some problems that a sudden curtailment in lending must cause:
- Companies. Usually, lending curbs occur in "snowstorm" fashion: everyone gets hurt. So, legitimate firms with legitimate borrowing needs get less access to credit, just like their less-legitimate cousins. As we have seen in the West: less lending means that companies get cash- starved, so they lose the working capital needed,
- Provinces. If banks lend less to the provinces, down goes their spending on infrastructure. This curtailment in infrastructure spending, in turn, will takes its toll on jobs. So unemployment rises.
- Stock market. According to Ms. Chen, " ' We estimate 1.8 trillion yuan of bank loans in 2009 (or 20 per cent of total new loans) have not yet been used for real economic activities. If this is true, then that money probably went into the stock market. As prices are made at the margin, our guess is that this strong "excess lending" has fueled the stock market rally considerably. So what happens once this fuel stops flowing...?
2. Links to Dubai
We don't want to get too creative here, but a couple of links to Dubai's crisis at the end of this November spring to mind:
Firstly, Dubai's woes caused the Nikkei to tumble by close to 4% within one week. Well, if this is what "just" Dubai can cause, then what kind of global ripple effect would be caused by the much larger and much more popular Shanghai and thus Hong Kong markets crashing?
Secondly, a policy shake-up in China - the type of knee-jerk reaction which we elder analysts have experienced before - could cause a global crash: markets hate surprises "coming from nowhere".
Finally, even the mere whisper of policy-wavering in China will be felt worldwide - and will drive up market volatility - bonds included.
3. How to Save Money Off This Idea
- Always consult your financial adviser first.
- Stay out of the China market for now. If anything, short it via an ETF such as one which I own, FXP:US
- Most certainly stay out of Chinese banking shares. Heavens knows what the policy struggles in China will result in; banks very well could get caught in the cross-fire.
- If you agree that policy-undulations in China will enhance volatility, then go long the dollar: carry trades will continue being unwound.
