China Credit Trust cites progress in avoiding shadow-bank default

Jan 23 (Reuters) - China Credit Trust Co Ltd, whose product could set a landmark precedent for default in China's fast-growing shadow bank sector, said it is in discussions with new investors in an effort to raise the funds necessary to pay off current investors when the high-yielding product matures on Jan. 31.

China Credit Trust also told investors in "Credit Equals Gold #1 Collective Trust Product" that the debt-ridden coal company whose loan from the trust company is about to mature has received a key government permit that will allow it to restart production on one of its coal mines, according to a statement from the trust company to investors obtained by Reuters.

Such a restart could enable the coal company, Shanxi Zhenfu Energy Group Ltd to generate the revenue necessary to repay investors.

Industrial Commercial Bank of China , which helped market the trust product to wealthy investors through several branches, has previously said it would not bear the "main responsibility" for repaying investors. ($1 = 6.0513 Chinese yuan) (Reporting by Gabriel Wildau; Editing by Kazunori Takada)

China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.

The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.

"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.

"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.

Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system.

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up. "Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said.

Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a "massive savings account that can be drawn down" in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire US 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.

The agency downgraded China's long-term currency rating to AA- debt in April but still thinks the government can handle any banking crisis, however bad. "The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk," said Mrs Chu.

"There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can't grow out of that."

The authorities have been trying to manage a soft-landing, deploying loan curbs and a high reserve ratio requirement (RRR) for banks to halt property speculation. The home price to income ratio has reached 16 to 18 in many cities, shutting workers out of the market. Shadow banking has plugged the gap for much of the last two years.

However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion.

Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises -- and many will not be able to pay interest or repay principal. She warned that the country could be on the verge of a "Minsky Moment", when the debt pyramid collapses under its own weight. "The debt snowball is getting bigger and bigger, without contributing to real activity," she said.

The latest twist is sudden stress in the overnight lending markets. "We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy," said Zhiwei Zhang from Nomura.

"There is room to cut interest rates and the reserve ratio in the second half," wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks.

The journal said total credit in China's financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. "Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output," it said.

It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. "China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens," it wrote.

The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.

HSBC Bank may Collapse

By DNA | January 25, 20141 Comment

Concerns about an imminent bank crash were further fueled today by news that HSBC are restricting the amount of cash that customers can withdraw from their own bank accounts.  Customers were told that without proof of the intended use of their own money, HSBC would refuse to release it.  This, and other worrying signs point to a possible financial crash in the near future.

HSBC Collapse

HSBC is scrambling to manage a seemingly terminal liquidity crisis (a lack of hard cash) that could see the bank become the next Northern Rock – and trigger a bank crash.  The analyst’s advice is for shareholders to sell HSBC investments, and for customers to move their accounts elsewhere before the crash.

This from the Telegraph:

Forensic Asia on Tuesday began its coverage of Britain’s largest banking group with a ‘sell’ recommendation, warning the lender had between $63.6bn (£38.7bn) and $92.3bn of “questionable assets” on its balance sheet, ranging from loan loss reserves and accrued interest to deferred tax assets, defined benefit pension schemes and opaque Level 3 assets.

Citing a report by the BBC’s MoneyBox Program, HSBC customers are withdrawingn cash from their accounts, simply because HSBC would not release the funds. Customers were told to make a bank transfer instead, unless they supplied documentation showing the planned use of their money. Stephen Cotton tried a withdrawal and told the program:

“When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.”

Mr Cotton says the staff refused to tell him how much he could have: “So I wrote out a few slips. I said, ‘Can I have £5,000?’ They said no. I said, ‘Can I have £4,000?’ They said no. And then I wrote one out for £3,000 and they said, ‘OK, we’ll give you that.’ “

He asked if he could return later that day to withdraw another £3,000, but he was told he could not do the same thing twice in one day.

As this was not a change to the Terms and Conditions of your bank account we had no need to pre-notify customers of the change”

He wrote to complain to HSBC about the new rules and also that he had not been informed of any change.

The bank said it did not have to tell him. “As this was not a change to the Terms and Conditions of your bank account, we had no need to pre-notify customers of the change,” HSBC wrote.

Mr Cotton is not alone, while other customers are seeking to withdraw cash amounts over £3,000 are they facing the same obstacles.  While HSBC argues that their customer’s well being comes first, the story simply doesn’t add up.  Customer identification is required for large withdrawals, not a customer’s intentions – a person’s cash is theirs to withdraw and place wherever they wish to so.  Instead, HSBC has been found to have a capitalized upon a black hole (gap between actual cash and obligations) of $80bn.  The message is simple, get your money out now.

The Gold Rush

The major banks and financial super powers appear to be preparing for an impending crisis, while pretending that the economic situation is improving.

There is a gold rush underway, with Banks and institutions frantically buying up as much gold reserves as they can, stoking fears that confidence in currency is at an all-time low.  Recently, banks like HSBC and JP Morgan, and countries such as the US, Germany and China have joined the gold rush, making vast purchases of stocks.

Investment analysts at Seeking Alpha have been monitoring the strange activity on the COMEX, stating:

“keeping track of COMEX inventories is something that is recommended for all serious investors who own physical gold and the gold ETFs (SPDR Gold Shares (GLD), PHYS, and CEF) because any abnormal inventory declines may signify extraordinary events behind the scenes.”

Another Bank Crash? Why?

The US dollar is a fiat currency  (so are the pound sterling, the euro and most other major currencies).  This means that it’s monopoly money.  There are no gold reserves that its values are imbedded into,  it’s simply made up.  So how does money get made? A private, for profit central bank prints it and lends it to the government (or other banks) at an interest rate.  So the Central Bank prints $100, and gives it to the government on the basis that it returns $101.  You may have already spotted the first flaw in this process.  The additional $1 can only come from the Central Bank.  There is never enough money. The second issue is that all money is debt.

This used to be the way pretty much all of the money in circulation came to be.  That is, until Investment and Retail Banks got tired of this monopoly on debt based currency, and kicked off the commercial money supply.  You might assume that when you take out a loan or other form of credit, a bank gives you that money from its reserves, and you then pay back that loan to the Bank at a given interest rate – the Bank making its profit on the interest rate.  You would be wrong. The Bank simply creates that loan on a computer screen.  Let’s say you are granted a loan for $100,000.  The moment that loan is approved and $100k is entered on the computer – that promise from you to the bank creates $100k for the bank, in that instant.  This ledger entry alone creates the $100k, from nothing. Today, over 97% of all money that exists, is made this way.

This is what drove the dodgy lending practises that created the last crisis.  But since then, the failure to regulate the markets means that while bailouts hit public services and the real economy – banks were free to continue the same behaviour, bringing the next crash.

The world’s second richest man, Warren Buffet warned us in 2003 that the derivatives market was ‘devised by madmen’ and a ‘weapon of mass destruction’ and we have only seen the first blast in this debt apocalypse.

The news that should have us all worried is: the derivatives market contains $700trn of these debts yet to implode.

Global GDP stands at $69.4trn a year.  This means that (primarily) Wall Street and the City of London have run up phantom paper debts of more than ten times of the annual earnings of the entire planet.

Not only can the Bankers not pay it back, the combined earning power of the earth could not pay it back in less than ten years if every last cent of our productive power went solely to pay off this debt.

This is why answering the issues with our currencies, our banking practices and economic system are not theoretical or academic – they are a matter of our very survival.

Source:

http://iacknowledge.net/

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