Mouse clicks and Magic Wands Won’t Save China

Tuesday, June 25, 2013 3:16
Posted in category The Big Picture

One of the things that I continue to find interesting about being in China, and having some understanding for how things work, is the enormity by which some simply do not understand China, how it works, or how fast it can act “once the government makes a decision”.

The most recent example coming in CNBC’s piece Stocks gone wild: Why are investors so panicked?

there’s a big difference between the panic-induced collapse of Lehman Brothers and the People’s Bank- engineered Chinese credit crunch. China’s central bankers can restore the flow of credit with the click of a mouse (or two).

A mouse click or two… seriously.  That is all it takes for Beijing to stabilize the world’s markets.

But  let me backtrack a bit as the bigger picture is worth a few moments as we find ourselves once again at a very familiar place in a narrative that seems to be on loop. China’s banks are overextended, it’s economy is stalling, and everyone is looking for someone to click a mouse.  Should Beijing not wave it’s magic wand (i.e the 3 trillion USD it has in reserves), it could all go to hell in a hand basket.. and fast.

Ok.  Well, as it is not that simple, and as China really doesn’t have a magic wand, I would like to point you all to another story from the WSJ that is actually insightful and provides a bit of context for why Beijing’s 3 trillion is not the mythical wand that everyone says it is.

From the article China’s ‘Shadow Banks’ Fan Debt-Bubble Fears

The lenders at Citic and other institutions that make up China’s “shadow banks” have created the closest thing China has to the culture of Wall Street. They take risks that traditional banks won’t, going so far as to create investment funds for assets like top-shelf liquor and mahogany furniture. Their top executives drive luxury cars and frequent expensive clubs.

Now, China’s shadow banks—a mélange of trust companies, insurance firms, leasing companies, pawnbrokers and other informal lenders subject to limited oversight—are at the center of mounting concerns over whether the country’s slowing economy could trigger a debt crisis.


China’s traditional banks, unlike most banks in the U.S. and Europe, are state-owned and lend mostly to big state-owned companies, leaving many would-be borrowers in the cold. Deposit rates are set by the government—with very little competition allowed—and banks often pay interest rates below the rate of inflation, whetting the appetite of depositors for higher yields.

That is where shadow banks come in. In a typical scenario, a borrower that needs money for a steel mill, highway or other project would get a short-term loan carrying a high interest rate. The shadow lender then would fold that loan, by itself or with others, into an investment product they can sell to investors, promising a high rate of return funded by the loan payments.

Which takes me back to a post that I wrote last year, China Will Never See a Bank Fail. It will See a System Collapse, where I alluded to the fact that while China could likely save a bank, perhaps two, the problem is that were the shit to hit the fan that wouldn’t even begin to stop the bleeding.

There are literally hundreds of actors who have gone on a credit fueled spending spree in the last 5 years, and if the analysis is correct and many lenders are not paying their loans back, then there is no mouse click that is going to make this problem go away.  It could be subprime, but unlike the analogies that simply put subprime to residential real estate, it would be a meltdown that was far more targeted towards China’s core economic growth and the firms behind it.

It would be Enron 1000 times over, and if the worst case analysis is right, there is little that could be done.

But then again, we have heard all this before right?

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2 Responses to “Mouse clicks and Magic Wands Won’t Save China”

  1. Chris Devonshire-Ellis says:

    June 26th, 2013 at 8:25 am

    I recently bought a five bedroom detached house on Lake Ontario for 1.2m CD. Today, a 2 bed apartment in Pudong is going for USD2.5m – over double. And whose saying there isn’t a bubble? Clearly China prices are incredibly inflated. But deflating that will lead to negative equity and social problems. China’s government is between a rock and a hard place right now, but one thing is for sure: avpid the property market. – Chris

  2. Rich says:

    June 27th, 2013 at 9:44 pm


    I have had that conversation for years … I just don’t get buying a flat here. you are better off being a tenant than an owner right now.