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While most of the attention in the Chinese shadow banking system is focused on the Credit Equals Gold #1 Trust’s default, as we first brought to investors’ attention here, and the PBOC has thrown nearly CNY 400 billion at the market in the last few days, there appears to be a bigger problem brewing. As China’s CNR reports, depositors in some of Yancheng City’s largest farmers’ co-operative mutual fund societies (“banks”) have been unable to withdraw “hundreds of millions” in deposits in the last few weeks. “Everyone wants to borrow and no one wants to save,” warned one ‘salesperson’, “and loan repayments are difficult to recover.” There is “no money” and the doors are locked.
The locked doors of one farmers’ co-op…
Shadow Banking has grown remarkably…
…in recent years, opened dozens of Yancheng local “farmers mutual funds Society”, these cooperatives approved the establishment by the competent local agriculture, and received by the local Civil Affairs Bureau issued a “certificate of registration of private non-enterprise units.”
As savers are promised big returns…
Deposit-taking and lending by cooperatives operated operation, and to promise savers, depositors after maturity deposits not only can get the interest, you can also get bonuses.
But recently things have turned around…
However, beginning in early 2013, Yancheng City Pavilion Lakes region continue to have a number of co-op money people to empty, many savers deposits can not be cashed, thus many people’s lives into a corner.
Dong-farmers in Salt Lake Pavilion mutual funds club, a duty officer’s office, told reporters, because many people take money, put out loans difficult to recover, leading to funding strand breaks.
Rough Google Translation:
Salesperson: …the money has been slowly falling and in the end is difficult to ask for money, right? And now there is no money coming in, now people don’t want to save money, and take all the money.
Reporter: But it’s their money, they should be able to…
Salesperson: I know I should [given them money]; however, when the turn started, their is no money, we get cut off and lenders and borrowers took off…
One depositor blames the government (for false promises):
The bank has a deposit-taking his staff, he would say that he is a government action that has the government’s official seal, to give you some interest, as well as the appropriate dividends, because we believe that the government, so we fully believe him , we put the money lost inside, who thought in November, Xi Chu who told us that something was wrong.
But don’t worry – this should all be settled by 2016…
Yu Long Zhang: we put all of his certificates of deposit are received out. You are only responsible for the loan out of the money back to the people against. The people’s money has been invested in other projects go, we have to be tracked to ensure no loss of capital assets, can dispose of his assets disposed of, can recover quickly come back.
Reporter: There is a specific timetable yet?
Yu Long Zhuang: 2014 cashing out the entire program.
Reporter: When did all of these things can be properly resolved?
Yu Long Zhuang: the latest is 2015, 2015, all settled.
So, for the Chinese, their bank deposits have suddenly become highly risky 2 year bonds…
Despite Erdogan’s paranoia over “an interest rate” lobby or blaming the Lira’s collapse on the Fed, as Gavekal’s Nick Andrews notes, Turkey is showing no signs of stabilization. As the sell-side scrambles to explain how this is all priced in and “contained,” it is very apparent from the following chart just how vulnerable to contagion the world is if Turkey defaults. The country’s liabilities have multipled dramatically in recent years with over $350 billion of foreign bank exposure to Turkey on an ultimate risk basis.
Fragile and Complacent… (and in denial)
Gavekal notes – Turkey is not, however, showing any signs of stabilization. The lira continues to fall, and policymakers are doing little to contain the situation.
With soaring inflation, a plunging currency and a run for the exits, one would think Turkey would do what other emerging markets did during last year’s taper tantrum, and hike rates.
Instead the new economy minister said recently that this is not necessary, since the country is in tip-top shape. “We couldn’t create an economic crisis in Turkey even if we wanted to, it’s that strong,” said the minister, whose predecessor was purged in the recent corruption scandal.
Turkey has some uniquely bad problems…
Not only is its current account deficit at nearly 8% of GDP – the highest in the MSCI’s emerging markets universe—but the country is also geographically closer and thus more dependent on the eurozone, whose economic recovery is painfully slow. Its political situation is also clearly very unstable.
Still, as the chart below shows, the country’s liabilities have multiplied in recent years – adding to global contagion pressures if Turkey defaults.
Indeed, already fragile Greece is particularly exposed to the Eurasian republic. Turkish credit as a proportion of total Greek bank assets stands at over 5%, compared to 0.7% for the next two largest (Dutch and UK banks).
As Gavekal notes though – Europe’s exposure would likely be mitigated by the European Central Bank with their now standard response of pumping excess liquidity into the euro system to ensure no bank runs out of cash. This might explain why the peripheral eurozone countries are not suffering more fallout from Greece’s exposure to Turkey.
However, with the new template in place, depositors in Europe’s banks exposed to Turkey may well prefer to pull their cash than trust their will be no haircuts for ECB aid…
While last night’s almost unprecedented reverse repo liquidty injection into the Chinese banking system stopped the bleeding of short-dated money-market rates briefly, the likelihood remains that a shadow-banking system default will occur: As CASS’s Zhang noted:
- *CHINA TRUSTS AND SHADOW BANKING TO SEE DEFAULTS IN 2014: ZHANG
- *CHINA SHADOW-BANKING DEFAULTS WOULD BE GOOD THING: CASS’S ZHANG
Perhaps that explains why China’s CDS spread remains at its highest since the summer credit crunch, barely budging on last night’s cash drop. At double the default risk of Japan, China appears far from out of the contagion fire.
China’s risk makes the US debt ceiling debacle look miniscule and while liquidity does not reign supreme in these markets, the last few months have seen considerably more activity in Asian sovereign CDS…
China’s Academy of Social Sciences Zhang Ming had a few other things to say…
- *CHINA EXPORTS MAY NOT BE AS GOOD AS MARKET EXPECTS: ZHANG
- *CHINA MONETARY POLICY TO REMAIN RELATIVELY TIGHT IN 2014: ZHANG
- *YUAN APPRECIATION COMING TO AN END, CASS’S ZHANG MING SAYS
- *YUAN MAY WEAKEN AFTER REACHING 6 PER DOLLAR: RESEARCHER ZHANG
and typically is seen as yet another mouthpiece for the administration… so that won’t please Schumer and his crowd…
Did you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st? We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“. In other words, it could be a “Lehman Brothers moment” for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion. That is an increase of $14 trillion in just a little bit more than 5 years. Much of that “hot money” has flowed into stocks, bonds and real estate in the United States. So what do you think is going to happen when that bubble collapses?
The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen. Never before has so much private debt been accumulated in such a short period of time. All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads. In fact, it is being projected that Chinese companies will pay out the equivalent ofapproximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014.
Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money. But the truth is that what has been happening in China surpasses all of their efforts combined. You can see an incredible chart which graphically illustrates this point right here. As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…
Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.
As with all other things in the financial world, what goes up must eventually come down.
And right now January 31st is shaping up to be a particularly important day for the Chinese financial system. The following is from a Reuters article…
The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.
Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.
If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly. A recent Forbes article explained why this is the case…
A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well. In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk. Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both. The result? The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.
The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China. According to Forbes, M2 in China increased by 13.6 percent last year…
And at the same time China’s money supply and credit are still expanding. Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth. Optimists say China is getting its credit addiction under control, but that’s not correct. In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.
Overall, M2 in China is up by about 1000 percent since 1999. That is absolutely insane.
And of course China is not the only place in the world where financial trouble signs are erupting. Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”…
Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.
Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.
If current trends continue, many other big banks will soon be experiencing a “bond headache” as well. At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years. Investors overwhelmingly believe that yields are heading higher.
If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.
But I am not the only one talking about it.
In fact, the World Economic Forum is warning about the exact same thing…
Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.
Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.
This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.
So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?
In the end, it doesn’t really matter. The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.
It is just a matter of time.
Bernanke’s Legacy: A Record $1.3 Trillion In Excess Deposits Over Loans At The “Big 4” Banks | Zero Hedge
The history books on Bernanke’s legacy have not even been started, and while the euphoria over the Fed’s balance sheet expansion to a ridiculous $4 trillion or about 25% of the US GDP has been well-telegraphed and manifests itself in a record high stock market and a matching record disparity between the haves and the have nots, there is never such a thing as a free lunch… or else the Fed should be crucified for not monetizing all debt since its inception over 100 years ago – just think of all the foregone “wealth effect.” Sarcasm aside, one thing that can be quantified and that few are talking about is the unprecedented, and record, amount of “deposits” held at US commercial banks over loans.
Naturally, these are not deposits in the conventional sense, but merely the balance sheet liability manifestation of the Fed’s excess reserves parked at banks. And as our readers know well by now (hereand here) it is these “excess deposits” that the Banks have used to run up risk in various permutations, most notably as the JPM CIO demonstrated, by attempting to corner various markets and other still unknown pathways, using the Fed’s excess liquidity as a source of initial and maintenance margin on synthetic positions.
So how does the record mismatch between deposits and loans look like? Well, for the Big 4 US banks, JPM, Wells, BofA and Citi it looks as follows.
What the above chart simply shows is the breakdown in the Excess Deposit over Loan series, which is shown in the chart below, which tracks the historical change in commercial bank loans and deposits. What is immediately obvious is that while loans and deposits moved hand in hand for most of history, starting with the collapse of Lehman loan creation has been virtually non-existent (total loans are now at levels seen at the time of Lehman’s collapse) while deposits have risen to just about $10 trillion. It is here that the Fed’s excess reserves have gone – the delta between the two is almost precisely the total amount of reserves injected by the Fed since the Lehman crisis.
As for the location of the remainder of the Fed-created excess reserves? Why it is held by none other than foreign banks operating in the US.
So what does all of this mean? In a nutshell, with the Fed now tapering QE and deposit formation slowing, banks will have no choice but to issue loans to offset the lack of outside money injection by the Fed. In other words, while bank “deposits” have already experienced the benefit of “future inflation”, and have manifested it in the stock market, it is now the turn of the matching asset to catch up. Which also means that while “deposit” growth (i.e., parked reserves) in the future will slow to a trickle, banks will have no choice but to flood the country with $2.5 trillion in loans, or a third of the currently outstanding loans, just to catch up to the head start provided by the Fed!
It is this loan creation that will jump start inside money and the flow through to the economy, resulting in the long-overdue growth. It is also this loan creation that means banks will no longer speculate as prop traders with the excess liquidity but go back to their roots as lenders. Most importantly, once banks launch this wholesale lending effort, it is then and only then that the true pernicious inflation from what the Fed has done in the past 5 years will finally rear its ugly head.
Finally, it is then that Bernanke’s legendary statement that he can “contain inflation in 15 minutes” will truly be tested. Which perhaps explains why he can’t wait to be as far away from the Marriner Eccles building as possible when the long-overdue reaction to his actions finally hits. Which is smart: now it is all Yellen responsibility.
There’s no question that the consumer has been leveraged up,’ Royal Bank CEO says
The Canadian Press Posted: Jan 14, 2014 2:08 PM ET Last Updated: Jan 14, 2014 2:08 PM ET
Canada’s biggest banks say consumers are reaching the limit on how much they can afford to borrow, and that’s likely to slow loan growth this year.
Royal Bank chief executive Gord Nixon said Tuesday he expects Canadian households will begin to show more restraint.
“In terms of pure consumer lending (growth), we’ll probably be operating at a much lower rate than we have been over the last few years,” he told a bank industry conference.
“There’s no question that the consumer has been leveraged up.”
Low rates will end
Canadians have taken advantage of low interest rates for years, borrowing record amounts, but leaving them vulnerable.
Policy-makers have expressed concern that a sudden rise in interest rates would leave many consumers unable to meet their payments, potentially causing a fallout that ripples through the housing market and consumer spending.
Statistics Canada reported last month that household debt touched an all-time high during the third-quarter of 2013, inching up 0.6 percentage points to 163.7 per cent over the summer months. The increase means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.
Nixon said he expects consumer lending growth to remain tight, rising by mid single-digit levels, for “an extended period of time.”
“What would be the most healthy outcome for the marketplace is for there to be a steady, orderly increase in interest rates to a reasonable level,” he said.
Focus away from consumer loans
Bank of Montreal chief executive Bill Downe said a slower increase in the debt levels of Canadians would help shift away from a dependence on the consumer for overall economic growth.
He expects U.S. business loans will become a more dominant force in the banking industry this year.
“We’re going to benefit from continued strong commercial and industrial loan growth and I think that’s going to spill over into Canada,” he said.
Downe said as consumers borrow less they will focus more on saving, which will benefit the wealth management business.
Scotiabank chief executive Brian Porter said he’s comfortable with the credit quality from its customers and doesn’t see any major concerns developing in the real estate market either.
“We would view supply and demand relatively in check across the country,” he said.
The European Central Bank is concerned that national differences in how bad debt is classified could cripple its probe into the health of euro-area banks, according to an internal ECB document.
Bad-debt classification practices across Europe show “material differences that, if not considered, would severely affect the consistency and credibility of the exercise,” according to the undated document obtained by Bloomberg News. A person familiar with the text said it was drawn up in late November and contains the ECB’s latest thinking on the subject. An ECB spokeswoman declined to comment.
The Frankfurt-based ECB is conducting a three-stage assessment of bank assets before it assumes oversight of about 130 lenders across the 18-member euro area this November. Using a strict definition of bad debt could threaten banks in countries hit hardest by Europe’s debt crisis, while a laxer rule may not reveal the true condition of the region’s financial system.
“A more ambitious definition would be consistent with the need to convey to external observers that the AQR is a thorough exercise,” the document said, referring to the Asset Quality Review stage of the Comprehensive Assessment. That’s set to culminate with a stress test run in cooperation with the European Banking Authority before October this year.
The ECB document said that not all countries may be able to comply with simplified definitions of non-performing loans set out in October by the London-based EBA, the EU’s top bank regulator, while saying that alignment to those rules is “of the essence.”
European banks’ bad loans are classified according to a variety of national rules, which makes a comparison among lenders difficult. The European Central Bank is struggling to harmonize the definition of non-performing loans so that it can give more credibility to its assessment of the credit quality of the region’s lenders.
In the first half of last year, total doubtful and non-performing loans as a proportion of lending calculated according to national rules exceeded 21 percent in Greece and were less than 1 percent in Sweden, ECB data show.
“It’s crucial to find common rules and a shared vision to overcome the national lobbies,” Karim Bertoni, a senior analyst on European equities at de Pury Pictet Turrettini & CIE SA in Geneva, said by telephone. “This is the main challenge for the ECB, which would allow a better management of banks and risk control.”
The ECB signaled it would apply the EBA’s simplified definition as a minimum, and where possible increase the level of detail on loans made by banks. The EBA sets financial standards for the 28 nations in the European Union, and is working with the ECB on the final part of the Comprehensive Assessment.
That minimum means the ECB would define as non-performing all exposures, including loans, debt securities, financial guarantees and other commitments, which are past due for more than 90 days. That differs from final, more complex, standards, due to be implemented by EBA by the end of this year, that include data on the likelihood of the borrower repaying. Only half of the countries examined could supply that data, according to the ECB report, while limiting the definition to the 90-day rule “seems feasible for the majority of countries.”
Euro-area lenders from Banco Santander SA (SAN) in Spain to Alpha Bank SA (ALPHA) in Greece will come under ECB supervision, with oversight forming the first pillar of a nascent banking union designed to mitigate future financial turmoil.
ECB policy makers have said the central bank will provide more information on the treatment of non-performing loans and the parameters of the concluding stress test by the end of January.
While the simplified EBA rules should be adhered to in the Comprehensive Assessment as a minimum, adding further detail to the assessment could be possible since ECB officials will already be in contact with bank staff, the document said.
“Given the possibility to perform more granular analysis during the on-site visits, it is proposed that this analysis takes into account a more ambitious definition including the unlikeliness to repay criterion,” according to the document.
The ECB said that as there are so many variations between countries on the definition of forbearance — where banks shift the terms of a loan to account for a change in the debtor’s own income — the only possibility is to accept national definitions where they exist, as well as loans that were considered in that category until the end of 2012 but have since been recategorized.
For countries where no standard definition exists, the ECB said it may ask states to report all loans for which concessions have been granted as forborne.
Despite telling us just yesterday that it would not take sides in the tensions in South Sudan…
- *U.S. NOT TAKING SIDES IN S SUDAN: PSAKI
the US government is on the verge of deciding to… take sides. As Reuters reports, the United States is weighing targeted sanctions against South Sudan due to its leaders’ failure to take steps to end a crisis that has brought the world’s youngest nation to the brink of civil war. Africa, aswe have discussed at length, remains the only region on earth with incremental debt capacity (and therefore growth in a Keynesian world) and so it is no surprise the US wants to get involved in yet another conflict.
“It’s a tool that has been discussed,” a source told Reuters on condition of anonymity about the possibility of U.S. sanctions against those blocking peace efforts or fueling violence in South Sudan. Another source confirmed the remarks, though both declined to provide details on the precise measures under consideration.
No decisions have been made yet, the sources added. Targeted sanctions focus on specific individuals, entities or sectors of country.
The U.S. government was unlikely to consider steps intended to economically harm impoverished South Sudan but would likely focus on any measures on those individuals or groups it sees as blocking efforts at brokering peace or committing atrocities.
As we discussed previously, there is an African scramble so it is unsurprisng the US would choose to take sides and get involved:
While those in the power and money echelons of the “developed” world scramble day after day to hold the pieces of the collapsing tower of cards in place (and manipulating public perception that all is well), knowing full well what the final outcome eventually will be, those who still have the capacity to look, and invest, in the future, are looking neither toward the US, nor Asia, and certainly not Europe, for one simple reason: there is no more incremental debt capacity at any level: sovereign, household, financial or corporate. Because without the ability to create debt out of thin air, be it on a secured or unsecured basis, the ability to “create” growth, at least in the current Keynesian paradigm, goes away with it. Yet there is one place where there is untapped credit creation potential, if not on an unsecured (i.e., future cash flow discounting), then certainly on a secured (hard asset collateral) basis. The place is Africa, and according to some estimates the continent, Africa can create between $5 and $10 trillion in secured debt, using its extensive untapped resources as first-lien collateral.
Africa is precisely where the smart money (and those who quietly run the abovementioned “power echelons”), namely China and Goldman Sachs, have refocused all their attention in the past year precisely because they both realize that Africa is the last and only bastion of untapped credit growth and capacity. But you won’t read about it in the mainstream papers: the last thing those who are currently splitting up Africa into its constituent parts want is for the general public to become aware what is in play. You will, however, read about it on these pages (see here and here and here). Also, if you are a Goldman client, you will certainly know all about it, as the firm ventures out with reverse inquiry indications of interest to its wealthy clients giving them the right of first equity refusal, and slowly but surely providing “financial services” to the last great hope for the developing world, which ironically is what most still consider the poorest continent…
Africa in geographical perspective…