Fitch's Charlene Chu: China Will Have Replicated the Entire U.S. Commercial Banking System in Five Years (Video)

On Bloomberg TV on June 18, Charlene Chu, head of China financial institutions at Fitch Ratings, warned about the risks facing China's banking system just two days before China's banking system completely seized up. She was one of the original bears on China after the Chinese government announced its 4 trillion yuan economic stimulus program in November 2008 (along with hedge fund manager Jim Chanos). Chu brought up some alarming numbers during her interview.

"A lot of people are aware that we've had a large expansion of credit in China but they are not aware of the magnitude. By the end of this year, this will be the fifth year running, we'll have increased 14 trillion U.S. dollars in assets. That's equivalent to the entire U.S. commercial banking sector. So China will have replicated the entire U.S. system in five years. You do not see credit expansions of that magnitude going smoothly over the long term. There's always some sort of fall out and that's why I said we're clearly going to have some banking sector problems. How that plays out is still unclear."

On where the money is going:

"A majority of the money certainly early on in the last five years was going to local government infrastructure projects and property. An increasing share of the credit has been extended through the shadow system the last few years. And the problem with shadow banking, the key problem is that we don't have transparency about who is doing the lending, where the money is going, what the quality of borrowers is, or even what the quality of these assets are. So we have a larger portion of the system in this black box that people don't know about."

On what will happen:

"One of the most common questions we get is are we going to have a crisis, and it's not necessarily given that we are. We are going to have banking sector problems. Those can manifest either in a crisis or they can manifest in slowing growth."

So a financial crisis, deleveraging cycle, or both. She even thinks that China could experience a "Japanese-style deflation" if a credit bust leads to a "massive over-capacity problem" (via The Telegraph).

Watch the Bloomberg video for more info.

(Source: Bloomberg TV)

In a Fitch Ratings press release, Charlene Chu's team estimated that more than 1.5 trillion yuan in wealth-management products will mature in the last 10 days of June (read below). That might explain why China's interbank lending and repo rates spiked to 25-30% on 6/20/2013.

Chinese Bank Liquidity Risks Rising (Fitch Ratings, 6/21/2013)

"Fitch Ratings-Beijing/London/Hong Kong-21 June 2013: Persistent tight liquidity conditions in China's financial sector could constrain the ability of some banks to meet upcoming obligations on maturing wealth-management products (WMPs) on a timely basis, Fitch Ratings says. We estimate that more than CNY1.5trn in WMPs - substitutes for time deposits - will mature in the last 10 days of June.

Issuance of new products, and borrowing from the interbank market, are among the most common sources of repayment for maturing WMPs, and the recent interbank liquidity shortage complicates both. China's mid-tier banks, also known as joint-stock, are likely to face the most difficulty, with an average of 20%-30% of total deposits in WMPs. This compares with 10%-20% for state-owned and city/rural banks. "

Articles to read:

China Swap Drops for a Fourth Day as PBOC Eases Cash Squeeze (Bloomberg, 6/25/2013)

Wenzhou Shadow Banking Unscathed by China Crunch as Rates Steady (Bloomberg, 6/25/2013)

PBOC Says It Will Ensure Stability of China Money Market (Bloomberg, 6/25/2013)

"China’s central bank said it will use tools to safeguard stability in money markets and tight liquidity is set to ease, giving the first official signs of relief for a cash squeeze in the world’s second-largest economy.

The People’s Bank of China has provided liquidity to some financial institutions to stabilize money-market rates and will use short-term liquidity operations and standing lending-facility tools to ensure steady markets, according to a statement posted to its website yesterday. It also called on commercial banks to improve their liquidity management."

PBOC Addresses Cash Crunch (WSJ, 6/25/2013)

"In a statement released late Tuesday, the People's Bank of China said it had injected funds into some financial institutions in recent days to beef up their liquidity and said it could make similar moves in the future.

Although it was short on details, the statement was the first acknowledgment that the central bank had responded to a cash shortage at China's banks that has rattled investors globally."

China's 'Shadow Banks' Fan Debt-Bubble Fears (WSJ, 6/24/2013)

"Between 2010 and 2012—a period during which traditional banks scaled back lending—shadow lenders doubled their outstanding loans to 36 trillion yuan ($5.8 trillion), or about 69% of China's gross domestic product, estimates J.P. Morgan Chase & Co. At so-called trust companies, a pillar of the shadow sector, assets under management have almost tripled to 8.7 trillion yuan, making the trust industry the second-largest financial-services sector in China, after banks."

China's PBoC Finally Adds Liquidity to Banking System After SHIBOR and Repo Rates Spike (Charts) (Distressed Volatility, 6/20/2013)

"SHIBOR, the Shanghai Interbank Offered Rate, which quotes overnight to 1-year loan rates between Chinese banks, and repo rates (repurchase agreements) all spiked yesterday in China (charts below). These rates measure the price of liquidity (liquidity risk) in the banking system."

Fitch says China credit bubble unprecedented in modern world history (Telegraph, 6/16/2013)

"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."

Here's why China's banking system froze up:

  • China's Economic Data Misses Estimates, Will the PBOC Increase the Money Supply to Stimulate Growth? (DV, 6/10/2013)
  • China's Government Plans To Unleash Free Market Forces as Manufacturing Activity Contracts (NYT, Manufacturing PMI) (DV, 5/25/2013)
  • Housing Goes For $3.2 Million In China's English-Style Ghost Town In Songjiang ("Thames Town") (DV, 5/11/2013)
  • Update on China's Real Estate Bubble, Credit Risk - w/ charts, Jim Chanos, China Vanke on 60 Minutes, and Michael Pettis Speeches (DV, 3/26/2013)
  • Short Selling Master Jim Chanos Was Interviewed on Bloomberg TV (12/5/2012) (DV, 12/7/2012)
  • Stimulus Watch: HSBC China Manufacturing PMI Falls to 48.4 (DV, 5/31/2012)
  • Nomura's Zhang: China GDP Growth Could Fall Below 8% Without Fiscal Stimulus (Video) (DV, 5/15/2012)
  • China CDS Breakout Predicted FXI Breakdown, Sovereign CDS Info (Charts) (DV, 10/11/2011)
  • Video of China's empty City of Ordos (DV, 9/11/2011)
  • China's 5Y CDS Broke Out To Early 2009 Levels, FXI at 2010 Support Level (Charts/Links) (DV, 8/10/2011)
  • Moody's: $540 Billion In China Local Government Debt Unaccounted For Understates Bank Exposure (DV, 7/5/2011)
  • Jim Chanos: China's Economic Growth Path Is Unsustainable (CNBC) (DV, 5/6/2011)
  • China Has 64 Million Vacant Apartments, Shanghai Property Index Near Inflection Point, Andy Xie On Inflation (DV, 4/25/2011)
  • Jim Chanos on China's Treadmill to Hell; It Is Using Price Controls to Tame Inflation (FXI, SSEC) (DV, 11/18/2010)
  • Clear Resistance Above $FXI, April China PMI, Jim Chanos on Fox, Vitaliy Katsenelson Report, Charts (Shanghai Composite, Hang Seng, $FXI, $EWH) (DV, 5/4/2010)
  • Chanos on Charlie Rose: China Property Bubble, RMB Devaluation? (FXI Analysis) (DV, 4/13/2010)
  • Jim Chanos Presentation Video On China, Shanghai 200DMA Chart ($SSEC) (DV, 2/3/2010)
  • FXI Under 200DMA, China Has Mini Real Estate Bubble According to NAI (DV, 1/26/2010)
  • Jim Chanos: China's Real Estate Bubble Is Unprecedented (CNBC, 1/25/2010)
  • Jim Chanos: Demand For Raw Materials In China Is Over-inflated (CNBC) (DV, 12/15/2009)
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