New industry needed in China to restructure debt and companies


China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research. “The world has never seen credit growth of this magnitude over a such short time,” she said in an email. “We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”

Headline figures for bad loans in China most likely do not capture the size of the problem, analysts say. In her analysis, Ms. Chu estimates that at the end of 2016, as much as 22 percent of the Chinese financial system’s loans and assets will be “nonperforming,” a banking industry term used to describe when a borrower has fallen behind on payments or is stressed in ways that make full repayment unlikely. In dollar terms, that works out to $6.6 trillion of troubled loans and assets.

After a previous credit boom in the 1990s, the Chinese government provided financial support to help clean up the country’s banks. But the cost of similar interventions today could be dauntingly high given the size of the latest credit boom. And more immediately, rising bad debts could crimp lending to strong companies, undermining economic growth in the process. “My sense is that the Chinese policy makers seem like a deer in the headlights,” Mr. Balding said. “They really don’t know what to do.”

A decade ago, the bad loans were $1 trillion or so. Now they are, what, 7x that? Who knows? But that’s not the whole picture. See the following, via the excitable David Stockman:

China’s construction infrastructure, for example, is grotesquely overbuilt—— from cement kilns, to construction equipment manufacturers and distributors, to sand and gravel movers, to construction site vendors of every stripe. For crying out loud, in three recent years China used more cement than did the United States during the entire 20th century! That is not indicative of a just a giddy boom; it’s evidence of a system that has gone mad digging, hauling, staging and constructing because there was unlimited credit available to finance the outpouring of China’s runaway construction machine.

Consider the case of China’s mammoth steel industry. It grew from about 70 million tons of production in the early 1990s to 825 million tons in 2014. Beijing’s tsunami of cheap credit enabled China’s state-owned steel companies to build new capacity at an even more fevered pace than the breakneck growth of annual production. Consequently, annual crude steel capacity now stands at nearly 1.2 billion tons, and nearly all of that capacity — about 65% of the world total — was built in the last ten years. Needless to say, it’s a sheer impossibility to expand efficiently the heaviest of heavy industries by 17X in a quarter century.

825 million tons? When we were at Citibank, lending to coal mining and steel companies 40 years ago, US steel industry production, per AISI, was around 100 million tons per year, and it still is. By comparison, 825 million tons seems just nuts. We know a lot about this, and 825 is off the charts, absent a war larger than WWII.

So China has not just a financial problem, it has a huge excess capacity problem, and both are in need of restructuring. But, as PWC notes, China doesn’t have a restructuring industry. In the years after Penn Central and W.T. Grant, a large financial/legal/operational industry arose in the US, focused on corporate restructurings in and out of bankruptcy. (We worked for a time with one of the industry pioneers.) It is very difficult to see how China will effect large financial and industrial restructurings without the legal, operational and financial infrastructure to do so. So that “deer in the headlights” comment above seems about right to us. Stay tuned.

Bonus fun. Speaking of new industries, here are some requirements for that new job: “Fluency in Java, Ruby, or Clojure. Familiarity with databases, especially NoSQL databases. The more of these, the better: Javascript, Python, .NET, iOS, Android, PHP.”

3 Responses to “New industry needed in China to restructure debt and companies”

  1. feeblemind Says:

    Seven trillion in bad loans.

    Who ultimately picks up the tab for that?

    That is orders of magnitude worse than 2008.

    Who knows what kind of ripple effect that will have?

  2. feeblemind Says:

    re the excitable David Stockman

    It’s not Stockman but how’s this for excitable?

    Citi: World economy seems trapped in ‘death spiral’

    The global economy seems trapped in a “death spiral” that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned.

  3. Steven Den Beste Says:

    It’s hard for me to beieve there’s market demand for that much steel in the world, especially with the ship building industry in a slump.

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