The news here is actually worse than I realized. One very alarming thing is that the Chinese banks have avoided writing down bad debt. I should have assumed this would happen, since it is hard to see how it could be avoided, given the nature of the Chinese culture. This is NOT a good idea. It is like pretending that defaults and bad debt simply don’t exist, and this is very bad for the financial sector in the long run.
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This is a singularly ominous combination that makes China’s economic future outlook over the next 25 years very grim. And that, in turn, will lead to acceleration of civil unrest. In fact, that has already happened: incidents of violent civil unrest have accelerated markedly all across China over the past year or two. But I think this could well get far more noticeable and disruptive. Some economists have said that in order to avoid disruptive amounts of civil unrest (as opposed to the more manageable baseline levels of unrest that are a constant), China’s economy must grow by 8.5% per year or more, just to keep enough people quiet. I suspect that is probably more or less approximately true in principle, although I don’t know where they came up with that number. But regardless of what that magic number might be, when that economy gets really bad—–watch out. That’s the seeds of civil war, if you ask me. If you have a very large group of desperate people coupled with an extreme polarization of wealth, you have a classic “haves” vs. “have nots” Marxian confrontation that is the underpinning of most if not all major revolutions.
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Well, I think you’ve got the equivalent in China, because both real estate and equity markets have formed frightening bubbles. And, just to add to things, an increasing proportion of both commercial and residential real estate lies vacant, building continues nonetheless, the banking sector’s fortunes are strongly tied to the construction and real estate markets, there is virtually no secondary market for real estate to speak of, and Chinese banks are notoriously reluctant to write down bad debt. Sounds to me a lot like Japan in the late 80s—only worse. The Nikkei even today is trading about 75% below where it was trading at the peak in late 1989. And that doesn’t even consider the change in buying power of the yen over that time. This is a devastating loss that takes at least a full generation to repair.

I think China will recapitulate what happened in Japan, and for all the same reasons. You’ve got precisely the same prerequisites for disaster in China, so why would it be any different this time? Plus, there are some additional reasons why things will be particularly bad there over then next 25 or 30 years. One thing we have learned about bubbles—-once they are fully formed, there is no way to tame them, just like a fully-formed wave at the Wedge when it’s really firing. They just have to expend their explosive energy, and anybody with the common sense God gave gravel will just get out of the way. There is no way to suppress or regulate these things once they begin to gather momentum.
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So what has happened to China’s exports?

Well—notwithstanding a never-ending stream of perennially wrong predictions for over 6 months that things are turning around and recovery is imminent—there’s no good news no matter where you look. The rosiest statistics involve those denominated in dollars, but that markedly underestimates the real RMB-linked economic impact. But what do these statistics show?

In November, exports dropped in China for the first time in 7 years. In December, the drop was even steeper, and exports have dropped every single month thereafter. In May, exports dropped over 26% compared to the same month last year, which was the greatest drop that economy has ever experienced. Worse, exports to the European Union (China’s biggest foreign market) plunged 41.3% in May.

Inexplicably however, many analysts (especially in China, unsurprisingly) insist the worst of the slump is over, despite little or no tangible evidence to support that conclusion. But this has been a constant theme since November: every month, government (and other) spokesmen in China assert that things would quickly improve. For example, after exports fell 22.6% in April (which was a record, until the following month), Commerce Ministry spokesman Yao Jian said that China was confident exports would imporve “on the basis of the gradual recovery seen in the first quarter.” Gradual recovery? You call plunging exports, with each month exceeding the previous month, “gradual recovery?”

The news here is actually worse than I realized. One very alarming thing is that the Chinese banks have avoided writing down bad debt. I should have assumed this would happen, since it is hard to see how it could be avoided, given the nature of the Chinese culture. This is NOT a good idea. It is like pretending that defaults and bad debt simply don’t exist, and this is very bad for the financial sector in the long run.

nd that, in turn, will lead to acceleration of civil unrest. In fact, that has already happened: incidents of violent civil unrest have accelerated markedly all across China over the past year or two.

China’s economy must grow by 8.5% per year or more, just to keep enough people quiet. I suspect that is probably more or less approximately true in principle,

But regardless of what that magic number might be, when that economy gets really bad—–watch out. That’s the seeds of civil war, if you ask me.

If you have a very large group of desperate people

I think China will recapitulate what happened in Japan, and for all the same reasons.

Gradual recovery? You call plunging exports, with each month exceeding the previous month, “gradual recovery?”

Distillates consumption poor: Hin Leong
Thu Jun 4, 2009
Reuters

By Yaw Yan Chong and Jennifer Tan

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Executive Director Evan Lim said there has not been any improvement in consumption for diesel and jet-kerosene fuel from major buyers Indonesia and Vietnam compared to last year, while supplies in Europe have been kept in floating storages rather than sold to end users.

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China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.
Fitch Ratings has been warning for some time that China's lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary," it said.

"Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear."
The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree".

Bank exposure to corporate debt has reached $4,200bn. It is rising at a 30pc rate, even as profits contract at a 35pc rate.

Fitch traces the 2009 bubble to the central bank's decision to cut interest on reserves to 0.72pc. Bankers responded to this "margin squeeze" by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China's monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye.

Under the Taylor Rule, US policy remains tight (for the US). China's policy is loose (for China). New loans doubled in May from a year earlier, almost entirely to companies.

China's Banking Regulatory Commission fired a warning shot last week. "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy," it said.

Banking system trembling in China
China's banks are an accident waiting to happen to every one of us

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5675198/Chinas-banks-are-an-accident-waiting-to-happen-to-every-one-of-us.html

China's banks are an accident waiting to happen to every one of us

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Unfortunately, 40pc of the "real economy" consists of exports, mostly to the US and Europe, the consequence of a mercantilist export model that has qcrashed and burned. Chinese exports were down 26pc in May.

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Andy Xie, a Sino-bear and commentator for Caijing, said Western analysts are in for a rude shock if they think that China's surging demand for raw materials implies genuine recovery.

Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation," he said.

Mr Xie thinks the spring recovery is an inventory spike, to be followed a double-dip downturn into next year as stimulus wears off.

China’s manufacturing expanded in July as record lending and a 4 trillion yuan ($585 billion) stimulus package stoked a recovery in the world’s fastest- growing major economy. The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 52.8, the highest level in a year, from 51.8 in June, CLSA Asia-Pacific Markets said today in an e-mailed statement ...

BEIJING (AP) - Beijing sold government bonds denominated in the mainland's yuan for the first time Monday in Hong Kong, adding to gradual moves to expand the international use of its tightly controlled currency.

Bonds from the 6 billion yuan ($875 million) issue were on sale to the public at Hong Kong banks. There was no immediate word on how well they were selling and how many were allocated to institutional investors.

Hong Kong is Chinese territory but has its own currency and regulatory system and often is used by Chinese companies to deal with foreign investors.

Beijing is gradually expanding the use abroad of the yuan, which does not trade on global markets. Beijing signed a currency swap deal with Argentina in March and has promised to lend yuan to the central banks of South Korea, Malaysia, Indonesia and Belarus in the event of a financial emergency.

Monday's sale should increase the private sector use of the yuan, according to finance analysts. A few mainland institutions, including state-owned China Construction Bank Ltd. and Bank of China Ltd., have issued yuan-denominated bonds in Hong Kong.

Hong Kong leaders want to develop the territory as a center for non-mainland trading of the yuan. They hope the business will boost finance industries that have been battered by the global economic crisis.

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.