We’ve been admittedly quiet on China of late, but it’s certainly not due to lack of material. In fact, it’s probably just the opposite – too much data, too little time! So here’s a few data points to keep you up to date, until we complete our series of posts following our Chinese Road Trip. We’ll keep this brief, but for those with an even shorter attention span, at least be sure to read Grandmaster Capital’s Parody About China embedded below.
As a reminder, for the past two years, we have argued that the rate of credit expansion in China has been unprecedented and would create many unintended consequences. Per Credit Suisse’s Andrew Garthwaite, “the increase in China’s bank credit to GDP ratio was greater than that observed in other credit booms in recent decades.” This is highlighted in the chart below. Note that each of these prior booms did not end well for the boomer. There are simply no exceptions here.
This is critical today as bad loans in the Chinese banking sector are now spreading across the country. Caixin recently reported on the Rise in Bad Loans spreading to places like Guangdong and Mongolia. Remember, these figures are still low by historic standards, particularly considering the 40% NPLs taken by Chinese banks during their most recent credit crisis. But this time around, given the magnitude of the boom displayed above, it wouldn’t take much to wipe out all bank capital in the system today. We figure that a rise equal to a quarter of the last peak would easily do it.
Anecdotally, loans aren’t the only thing going bad in China. Last month, a large section of a highway collapsed in Luchun County, Yunnan Province. The accident caused a van to plunge over 1 kilometer off of a cliff. The 133-kilometer road opened for use April 27, at a cost of about 4.2 billion yuan.
It’s taken some time, but the market appears to be catching up to the fact that China is not immune to slowing economic growth. And roughly one year after the WSJ picked up our bet on the CNY, in a piece titled Investors Hazard Bold Bet on Yuan, it has become increasingly apparent that currencies can and do move in two directions.
“Our best and brightest feel that China’s system is working wonderfully, and that it faces only a modest reduction in its future growth rate as it continues indefinitely to grow faster than the rest of the world.” To grasp just how preposterous that statement is, take a minute to enjoy this Imaginary Press Conference by President Obama.