Posts Tagged ‘credit growth’

Deleveraging of Australia’s private sector

Thursday, June 3rd, 2010

Back in Significant slowdown for Australia ahead?, we explained how the slowdown in credit growth can suck away aggregate spending in the economy. Today, we will show you credit growth in Australia from January 2000 to April 2010:

Credit Growth (YoY) Australia

As you can see, year-on-year credit growth almost ZERO on November 2009 before bouncing up and then returning down from March 2010 onwards.

As you can see, such a precipitous fall in credit growth should be very painful for the economy. However, the reason why it did not fall into serious recession was due to the crutch of government spending.

If the private sector continues to de-leverage, then the government will have to continue spending in order to prevent the economy from falling into recession. If so, then it means that the budget deficit will have to continue to grow.

Is China going to allow its banks to fail in the upcoming (potentially gigantic) wave of bad debts?

Tuesday, March 9th, 2010

Last month, we reported that Marc Faber commented that China is going to slow down in 2010 (see the video in Is China going to dump their excess metal stockpiles?). The question investors should ask themselves is that whether China is going to slow down to say, 3% to 6% GDP growth or is it going to crash?

We will come to the question later. But first, the current mainstream forecast believes that China will grow 8% to 9% in 2010. Why? Because last Friday, Premier Wen Jiabao announced that he is targeting growth to be 8%.? China is the only country in the world where the government knows in advance what the GDP growth figures will be. If they declare that target for GDP growth is 8%, it will be at least 8%. The question is (1) how much the statistics are tortured and fudged to get arrive at the intended figure and (2) the quality of the GDP growth.

Now, here comes the question: will China crash in 2010/2011?

We don’t know the future, but this is a possibility. According to Marc Faber, the reason is because the Chinese government is clamping down on rampant credit growth. For debt-addicted Western economies, a significant slow down in credit growth will have serious negative impact on the economy. Correspondingly, a clamp down in credit growth will have unpredictable results to the Chinese economy.

The clamp down in credit growth is part of bigger picture. Unlike prior to 2008, China seems to be getting more serious about restraining the economy from overheating. All they have to do is to look across the ocean and look at Japan as an object lesson for not reining in credit and asset price bubbles early on. Since today’s Chinese economy is still developing (unlike the developed Japanese economy in 1990), the consequences of a burst bubble will be much more damaging than Japan’s long-term stagnation. Two months ago, in Chinese government cornered by inflation, bubbles & rich-poor gap, we were pondering what will China choose- voluntary slow-down or an involuntary inflationary melt-up.? As we wrote,

But there will be a day when they have to tackle the inflation problem.

There are signs that the Chinese government is getting more serious about doing so. However, it must be noted that the Chinese government is still on a capitalistic learning curve. That’s why the government’s economic edicts veer from one extreme to another extreme, which is pretty erratic (and authoritarian) relative to Western standards. There’s a chance that they may make a misstep and crash the economy.

The BookDepository

One very important development was reported yesterday: China is nullifying loan guarantees of local governments (see China to Nullify Loan Guarantees by Local Governments). To understand the implication of this, a little background is necessary. China’s local governments are not allowed to borrow directly. In order to raise funds for the stimulus infrastructure projects, they set up special investment vehicles to borrow from banks. Then they guarantee the debts of these vehicles. Through this means, Northwestern University Professor Victor Shih calculates that local governments have already accumulated RMB 11 trillion (US$ 1.7 trillion) in outstanding debt, with RMB $13 trillion (US$ 1.9 trillion) in available credit lines, belying China?s deceptively low reported levels of public debt (see Is China allowed to use its US$2.4 trillion reserve to spend its way out of any potential crisis?). In one swoop, the central government’s planned edict will nullify the loan guarantees and ban future ones.

Now, since many of the stimulus projects were not creditworthy by themselves in the first place, the removal of local government guarantees implies that many of these debts will become bad debt. According to Professor Victor Shih, a crackdown on such loans at the end of 2009 could trigger a ?gigantic wave? of bad debts as projects are left without funding. Not only that, ?By striking the fear of God into lenders, regulators hope to get them to turn off the [credit] tap,? said Patrick Chovanec, a professor at Tsinghua University in Beijing.

Since this is a serious systemic risk to the Chinese banking system, how will the central government deal with the likely gigantic wave of bad debts? We don’t know. But in 1998, it allowed Guangdong International Trust & Investment Corp (GITIC), a major bank, to collapse. According to Bloomberg,

The 1998 collapse of Guangdong International Trust & Investment Corp., which borrowed domestically and overseas on behalf of southern China?s Guangdong province, left creditors including Dresdner Bank AG of Germany and Bank One Corp. in the U.S. with $3 billion of unpaid bonds. It marked the first time that Chinese authorities failed to bail out one of the nation?s state-owned trusts.

Our guess is that, some of the hundreds of less important (or less well-connected) Chinese banks could be allowed to fail.

Only time can tell.

Australia’s credit growth is still falling

Tuesday, September 29th, 2009

Marc Faber once said that for an economy that is addicted to debt, all it needs to tip it into a recession is for credit growth to slow down- no contraction of credit is required. Also, as Professor Steve Keen explained, at this stage of the debt cycle, the aggregate spending in the economy is made up of income plus change in debt. In the absence of income growth, a slowdown in credit growth implies declining aggregate spending by the private sector.

Now, let’s take a look at Australia’s year-on-year credit growth (up till July 2009):

Year-on-year credit growth in Australia (July 2009)

Year-on-year credit growth in Australia (July 2009)

It’s now the government doing a bigger and bigger share of the spending.

Will August 2009 be the top for the year in China?

Sunday, August 23rd, 2009

Last time, it used to be that the US stock market ‘leads’ the world’s stock market. As the saying goes, when America sneezes, the rest of the world catches a cold. If the Dow Jones plunges, the stock markets in Europe and Asia will likely ‘follow.’ Recently, over the past few years, a curious phenomenon seems to be occurring more often- the US stock market is ‘following’ the rest of the world, particularly China.

Indeed, the stock market is a fine example of the study of human herd behaviour.

Now, as every investor or trader should know, the Chinese stock market had fallen around 20% from the early August high. In our view, it is likely that this will be the high for at least 2009. Why?

Back in Is China setting itself up for a credit bust? and How big is the credit bubble in China?, the Chinese government was force feeding large quantity of credit into the Chinese financial system. Unlike in democratic Western countries, Chinese banks cannot refuse to follow the directives of their central government. They had to lend in order to reach a target set out by the government. As we all know, the collapse of the Chinese export sector was putting downward pressure on the economy. As a result, private demand for credit was anaemic.

If the banks had to lend and businesses did not want to borrow, what then?

Then the Chinese business culture of doing favours for each other kicks in. The credit-worthy businesses that the banks lent to (who have no expansion plans in the face of dwindling foreign demand), took the money nevertheless. Then the monies was poured into the stock and property market. That’s why both the property and stock market boomed so quickly after a dramatic collapse from last year. It is also likely that some of the monies are used to speculate in commodities- how can the divergence between real Chinese demand and commodity prices be explained?

In July, it was widely reported in the news media that the Chinese government clamped down on new loans. Consequently, loan growth plunged. If a raging bull market is financed by credit, then all it takes is a dramatic slowdown in credit growth to crunch the bull market. Below is the graph of China’s credit growth:

Chinese loan growth
Click on graph to see it in full size

One interpretation sees the Chinese government as still learning the ropes of capitalism. Forcing credit growth in this case does not result in economic ‘stimulation.’ Instead, the result was a dangerous asset price bubble. Apparently, the Chinese government flipped its position and decided to rein in the bubble before its too late.

The question is: what is the implication of this on commodity prices? And will the rest of the world follow?

Credit growth in Australia- a portent of something?

Wednesday, May 27th, 2009

Today, we will show you a graph:

Year-on-year credit growth till March 2009

This graph shows the year-on-year credit growth in Australia from January 2000 to March 2009. As you can see, after credit growth peaked in January 2008 at 17.28%, it declined to 5.17% in March 2009. As you can see from the graph, the decline is pretty steep.

In a highly indebted nation like Australia, credit growth is what keeps the economy ticking. Such a rapid deceleration in credit growth will have a serious impact on the economy.

Will Australia’s own pump-priming work?

Tuesday, October 14th, 2008

As you have heard in the news by now, Australia’s Prime Minister Kevin Rudd announced a AU$10 billion stimulus plan. This is partially reminiscent to the US stimulus plan sometime at the beginning of this year, when the US government sent free money to American taxpayers and called them tax rebates. Rudd’s plan includes money for families, retirees, homebuyers and jobs training and infrastructure projects.

Will all these work?

Before we answer this question, let us consider the relative scale of the problem. According to Professor Steve Keen, Australians’ increased debt last year added $250 billion in spending into the economy. Currently, Australia’s credit growth is decelerating very rapidly. Should credit growth stagnate (or worse still, contract), this $250 billion (or more) in spending will go up in smoke. Therefore, a $10 billion stimulus is actually very minuscule compared to the potential loss in spending by Australian consumers when they are stretched to their limit in taking in more debt. Since most of the Australian economy is made up of consumer spending, such a severe contraction will have a very acute repercussion for the Australian economy. Recent data suggests that Australia’s total private data to GDP ratio is standing still at 165%.

There is no way the government can take up the slack left by the Australian consumer without turning the budget surplus into a deficit that is ten times its size (i.e. turn $22 billion surplus into a $250 billion deficit). But to keep Australians spending as before, they will have to accrue even more debt. There’s no way this increase in debt relative to income can go on forever without turning the entire nation’s economy into a massive sub-prime economy. When that happens, the inevitable blow up in debt bubble will be far greater.

By now, you should appreciate the magnitude of what the government and RBA are fighting against when you consider the scale of the coming deflationary force.

Australia’s credit growth to June 2008

Tuesday, September 2nd, 2008

Today, we will show you the graph of Australia’s credit growth since January 1990 to June 2008. What do you notice in the business credit growth?