Or does the government already do this? If so, can anyone explain like I'm five?
Despite the looming debt pile, local governments are also under pressure to drive spending on science and technology as Beijing is increasingly shunned by the West.
Provincial governments accounted for at least 60% of the total government expenditure on technology in 2022, the Rhodium Group said in a report in December 2023.
Chinese finance news group Caixin Global reported that China’s local governments made bond interest payments worth $174 billion last year alone. That was a record figure — up by almost 10% from 2022.
An improvement in the financial health of local governments will be challenging this year as well, as the world’s second largest economy continues to struggle in its post-Covid recovery, the property market slump drags on and the state of Chinese developers continues to worsen.
Cross-posted from: https://beehaw.org/post/11486860
A huge problem with China’s economic model over the past two decades has been the fact that it has been a debt-based finance model massively concentrated on real estate speculation beyond what the economy can digest.
The problem is that real estate, especially apartments in China, for more than two decades, appeared to be a guaranteed money maker for owners as well as builders and banks and above all, local government officials. Prices rose annually in the double digits, sometimes by 20%. Millions of middle-class Chinese bought not just one, but two or more apartments, using the second as investment for future retirement.
China’s land is owned by the Communist Party, at the local level. It is leased long-term to construction firms who then borrow to build. For CP local government officials, revenue from local real estate land leasing and their infrastructure projects is their major revenue source.
China's macro leverage ratio, or total outstanding non-financial debt as a share of its nominal GDP, climbed by over $560 billion to reach 287.8 percent last year, more than twice the roughly 120 percent of its economic rival the U.S. The new data would put China ahead of Japan, previously the world's most indebted country, whose sovereign debt accounted for about 220 percent of its GDP by the second quarter of 2023.
China is embarking on its biggest consolidation in the banking industry by merging hundreds of rural lenders into regional behemoths amid growing signs of financial stress.
After engineering mergers of rural cooperatives and rural commercial banks in at least seven provinces since 2022, policymakers pinpointed tackling risks at the $6.7 trillion sector as one of its top priorities for this year. That means another wave of consolidation is on the way across the nation.
China’s banking industry has been weighed down by a litany of troubles over the past years, including a deepening slump in the real estate market and an overall fragile economy. The 2,100 banks in the rural cooperative system saw their bad-loan ratio stand at 3.48% at the end of 2022, more than twice as high as that for the whole sector.
"It’s where risks are the most concentrated among smaller financial institutions, so China is pushing the reform at a faster pace,” said Liu Xiaochun, deputy director of think-tank Shanghai Finance Institute. “And one key solution to resolving the risks is through mergers and reorganizations.”
The stakes are high politically as well. Hundreds of people protested in central Henan province in 2022 after a multi-billion-dollar scam at several local lenders left them clamoring for their savings.
Jason Bedford, who predicted earlier troubles at China’s regional banks that rocked markets in 2019, said the rural cooperatives are “probably the least transparent part of the banking system.” China has disposed of bad debt equivalent to about 13% of its gross domestic product in its last big cleanup of the banking system during 2016 and 2022, he said.
“We’re left with only a toxic tail of significantly smaller institutions,” said Bedford, a former analyst with Bridgewater Associates and UBS Group AG. While the contagion risk across the financial system is seen limited, these lenders can be “very disruptive” within their specific regions should they blow up.
While China’s multi-year crackdown on risks has halved the total number of high-risk lenders to 337 by June, some 96% of them were small rural commercial banks and credit cooperatives as well as village and county banks, according to the central bank.
First created in early 1950s, the cooperatives were in their early days mutually-funded, collectively-owned institutions by farmers in socialist communes. The majority of them had been transformed into rural commercial banks over the years.
While the system plays a crucial role in lending to underdeveloped areas, many had long struggled with weak profits, soured assets and lax governance. The group has also been operating in a more difficult environment since 2019, when China’s push for more loans toward small and medium-sized enterprises triggered a price war with bigger banks.
Lack of oversight and proper governance at these lenders has been a persistent issue. Some rural cooperatives are operated essentially as a “cash machine” for big shareholders, the central bank said in its 2023 financial stability report. Some had also deviated from their policy role of servicing the rural and agricultural areas by extending big loans to other areas to achieve growth.
The latest push to merge lending cooperatives got underway in 2022, when regulators called on transforming 25 provincial-level cooperatives created in the early 2000s into modern financial enterprises to further cut risks.
The government had since authorized seven provinces to consolidate their over 500 smaller lenders either through mergers or a shareholding structure, according to data compiled by Bloomberg. While the mergers created bigger financial institutions, they aren’t necessarily stronger because the transactions weren’t always done in a market-oriented approach.
One case is Liaoshen Bank Co., which China created in 2021 to absorb dozen lenders with soured balance sheets. The lender still had a bad loan ratio of 4.67% as of end-2022, according to its filing, compared with 1.85% for city commercial banks on the whole.
“The reform will have to really tackle the problems instead of sweeping them under the rug,” said Liu, who in early years of his career oversaw some rural credit cooperatives for Agricultural Bank of China Ltd. in Zhejiang. “Legacy issues could cripple the operations of newly formed institutions if they’re simply covered up, and in a worse case induce more problems and bigger hazards.”
Conflicts may also arise on internal management level, as all parties brought together, strong or weak, will now have to carve up one big cake, according to Shen Meng, a director at Beijing-based investment bank Chanson & Co.
“You don’t really get a big ship by just bundling ten dinghies,” Shen said. “The fundamental issues are still left unresolved."
China’s benchmark CSI 300 Index plunged to a five-year low early last week. The index has now lost a fifth of its value in the last nine months as investors dumped stocks amid concerns over the country’s economy. Hong Kong’s main share index has also been hit by the rout, with its value down 44pc over the past five years.
Beijing has been battling to reverse the decline through policies such as cutting bank reserves.
The drop followed a 4.4% profit fall in the first 11 months from the same period a year earlier, according to data from the National Bureau of Statistics (NBS).
Last year's profits decline was chiefly due to sharply lower factory-gate prices, driven by over-capacity in some industries, said economist Nie Wen at Hwabao Trust in Shanghai.
Industrial profits will likely rise by between 5% and 6% this year, as a slight improvement in demand and historic lows in inventories in China, Europe, the United States and Japan will lead to a rebound in industrial prices, Nie said.
A new study published in Nature observed that stronger political connections in private listed real estate firms in China positively correlate with increased levels of excessive debt and heightened debt repayment pressures, culminating in an accumulation of credit risks.
The main reasons for private real estate companies’ excessive debt in order to expand investment are as follows.
First, politically connected enterprises are more likely to obtain financing and increase the book-free cash flow, while the over-investment theory believes that the increase in book-free cash flow means an increase of over-investment probability.
Second, real estate has always been an important growth point of the local government’s economy, “GDP doctrine” before the economic transformation and upgrading often makes local government require its associated real estate enterprises to expand investment more blindly.
Third, the professional knowledge of senior executives transferred from government departments is often lacking, and they are more likely to pursue short-term interests and over-invest. Eventually, excessive liabilities will be formed.
China’s real estate sector may get another massive shock in just a few days.
On Monday, China Evergrande Group—the massively indebted developer whose troubles arguably triggered China’s real estate crisis in the first place—will face a critical liquidation hearing in Hong Kong.
Evergrande defaulted on its offshore debt in December 2021, which sparked a liquidity crisis in the real estate sector that pushed several other Chinese developers to default as well. It’s only gotten worse from there: Evergrande reported combined losses of $81 billion in 2021 and 2022, and it lost $4.5 billion in the first half of 2023. Then the developer filed for bankruptcy protection in the U.S. last August. And in September, Chinese authorities detained Evergrande’s onetime billionaire chairman, Hui Ka Yan, for “illegal crimes.”
Real estate is critical to the Chinese economy, at times contributing as much as 30% of the country’s GDP. Property is also an important store of wealth for Chinese households.
"I’ve been in China for 27 years, and this is probably the lowest confidence I’ve ever seen,” says Shaun Rein, founder of the China Market Research Group.
Among the more tremulous sectors of the Chinese economy, Rein identified the country’s once-bloated real estate market, which accounts for roughly a third of China’s economic activity and has been tumbling sharply since Beijing’s broad-stroke crackdown on the debt levels of mainland property developers. Real estate giants Evergrande and Country Garden have become key casualties of the clampdown.
″[Buyers] think housing prices might continue to drop, so even if there’s pent-up demand for housing, a lot of home buyers are telling us, we’re not going to buy this month, we’re not going to buy this quarter, because we’re scared prices are going to drop another couple [of] percent in the coming months,” Rein says.
Cross-posted from: https://feddit.de/post/8237015
In some sectors in Germany, a small number of specialised IT service providers serve a large proportion of banks and insurers. That is why this year BaFin is paying particular attention to the risks that emerge from this kind of market concentration, the German Federal Financial Supervisory Authority (BaFin) says in a report.
BaFin has identified a total of seven risks that it considers most capable of jeopardising the financial stability or the integrity of the German financial system. It will pay particularly close attention to these risks in 2024. The report “Risks in BaFin’s Focus” also details the action BaFin is taking to mitigate these risks.
Cross-posted from: https://beehaw.org/post/11211601
Across the dozens of economic indicators released by China’s National Bureau of Statistics last week, few demonstrated the difficulty of pinning down the state of the world’s second-biggest economy better than the steel data.
Just months ago, steel output – previously subject to an informal cap as Beijing sought to curb emissions and production – was on course to expand significantly in 2023 for the first time in two years.
But – in line with an official desire to reduce output – December production fell 15 per cent year-on-year to its weakest level since 2017, a rate of decline that meant total annual output edged up, but remained essentially flat at just over 1 billion tons.
New economic indicators revealed by the Chinese government paint a picture of an economy that is still struggling to find its footing in the wake of the COVID-19 pandemic, even though it surpassed the modest growth target set by the central government.
According to data released on Wednesday by the National Bureau of Statistics, the Chinese economy grew by 5.2% in 2023. However, the same report reveals that the country is still suffering from persistent deflation, an ongoing crisis in its real estate market, a high youth unemployment and long-term demographic decline.
Cross-posted from: https://feddit.de/post/8026033
Data this week out of Beijing showing GDP growth at its weakest since 1990, outside the pandemic years, added to concerns officials are not doing enough to provide support.
China's economy grew 5.2% in 2023, slightly more than the official target, but the recovery was far shakier than many analysts and investors expected, with a deepening property crisis, mounting deflationary risks and tepid demand casting a pall over the outlook for this year.
Expectations that the world's second-largest economy would stage a strong post-COVID bounce quickly fizzled as the year progressed, with weak consumer and business confidence, mounting local government debts and slowing global growth sharply weighing on jobs, activity and investment.
After two years of underperformance, global real estate investment trusts are expected to outperform in 2024 due to a decline of supply and resilient corporate valuations, according to a new report from Hazelview Investments.
It found global REITs saw a turnaround rally of 18.9 per cent over the last two months of 2023, leading the asset class to end the year with an increase of 10.8 per cent. Nonetheless, global REITs underperformed compared to global equities, lagging by 1,359 basis points.
China is Japan's largest trading partner, and one of the biggest investment destinations for Japanese companies.
Uncertainty about China's economic prospects and pessimism about weak demand were cited as top reasons why 48 per cent of the companies surveyed said they did not invest in China or reduced their investment in 2023 compared to a year earlier.
The companies also said they were concerned how Chinese laws on espionage and cross-border data flows would play out.
The producer price index (PPI) tumbled 2.7 per cent after a 3 per cent fall in November, marking the 15th straight month of declines. Analysts had expected a 2.6 per cent slide in December.
The latest data underscores the broader weakness in demand across the economy, keeping policymakers alert to any entrenched expectations of price falls. China's central bank has pledged to step up macroeconomic policy adjustments to support the economy and drive a rebound in prices.
Data from recent months suggests that price growth has lost momentum. The annual average inflation rate in 2023 remains the highest in the world, but everything indicates, according to experts, that more moderate levels are coming, along with a degree of economic expansion.
The state banks were seen swapping yuan for US dollars in the onshore swap market before quickly selling those dollars in the spot market to support the yuan from Wednesday to Friday, two of the sources said.
The overnight CNH Hong Kong Interbank Offered Rate benchmark (CNH HIBOR), a gauge that measures the yuan's borrowing cost in the financial hub, jumped to 3.3562 per cent on Friday, its highest since Dec 19.
The state bank actions come as the Chinese yuan faces renewed downside pressure against a globally resurgent US dollar. The yuan has fallen to a three-week low against the dollar.
Chinese state-owned banks usually trade on behalf of the nation's central bank in the foreign exchange market, but they could also trade on their own behalf.
In recent months, China has sought to stabilise the yuan.
Despite a litany of support measures, China's lingering property crisis impacted consumer confidence and weighed on the broader economy. This has led to calls for more aggressive stimulus amid fears of a deepening slowdown in the world’s second-largest economy.
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