solarz
Brigadier
WeChat is a great example of Chinese innovation. It's Twitter, Facebook, Paypal, and Whatsapp all cleverly rolled into one simple, elegant package.
Chinese Economics Thread
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WeChat is a great example of Chinese innovation. It's Twitter, Facebook, Paypal, and Whatsapp all cleverly rolled into one simple, elegant package.
Hendrik_2000
Lieutenant General
So much for the bank collapse theory and on the next article It show why real estate never collapse
Can China Avoid a Banking Armageddon?
With expected losses of $3.5 trillion, BNP Paribas’ Chi Lo analyzes the banking sector’s worst case scenario.
April 6, 2016
Some market players believe that China would see a banking crisis soon, with losses expected to amount to USD3.5 trillion, or 30.4% of the banks’ total equity, or four times larger than the equity hit that US banks took during the subprime crisis. Recent reports that China had almost USD600 billion unpaid receivables, the largest amount since the late 1990s, only aggravated such fears.
To understand the rationale of this “Armageddon” scenario, one needs to know where the biggest risk exposure of the Chinese banks is. It is not the loans to the state-owned enterprises (SoEs) or the households. The former enjoys implicit guarantee from the government and the latter has a strong balance sheet.
The highest credit risk lies in the loans to the corporate sector and non-depository financial institutions (NDFIs). The latter include investment companies, brokerages, trust companies, auto-financing and financial leasing companies and private loan companies. They do not enjoy the same degree of implicit guarantee as the SoEs and the banks, and are not regulated properly.
Chi Lo, Senior Economist, BNP Paribas Investment Partners (Asia) Ltd.
According to banking and official data, loans to the enterprises and NDFIs totalled RMB79.4 trillion in 2015 (see Table 1), which accounted for 84.5% of total loans. Let us assume two loss scenarios, one with a 10% loss and the other with a 15% loss on these loans.
Official data shows that the banking system had an aggregate RMB2.3 trillion loan-loss provisions last year. Experience also shows that Chinese banks had an average bad-debt recovery rate of 20%. Assuming all the provisions would be used to cover losses and the same bad-debt recovery rate going forward, the potential net loss to the banking system would amount to RMB4.0 trillion and RMB7.2 trillion under scenario 1 and 2, respectively (see Table 1).
Chinese banks had an aggregate equity capital of RMB13.1 trillion in 2015. The stylised example here shows that if banks’ bad-loan ratios were to rise to 10% or 15%, the estimated losses could wipe out 31% to 55% of the banks’ aggregate equity.
The losses we have assumed here are arbitrary. If realised losses were lower/higher, the hit on banks’ equity would be lower/higher. Given the prevailing economic weakness in China, a 10%-15% non-performing-loan scenario looks plausible. There could also be bad debt arising from other loan categories.
Conventional wisdom has that China would be facing a banking and currency crisis soon. But this view hinges upon the creditors’ behaviour. In an open and matured market, which is how most western analysts seem to see China, the creditors would lose faith in the debtors and cut funding. The banking system would collapse, crushing the economy and the exchange rate.
However, the creditors in China are the households, who are ultimately backed up by the government’s implicit guarantee policy. So there is still no loss of public confidence. This also means that the probability of bank runs is very low. Meanwhile, China’s closed capital account helps lock up domestic liquidity, providing a backstop for keeping the banking system whole.
Even though the central government is calling for a clean-up of zombie companies, it is also asking banks to ensure the process does not cause any financial instability, i.e. not to cut off funding abruptly. Granted, this policy is not going to solve China’s debt and capital misallocation problems. But it means that China could avoid a financial implosion for longer than many analysts have expected.
So long as there is no loss of public confidence and the creditors in China do not cut off funding to the banks and NDFIs which, in turn, do not cut off funding to the zombie companies, there would not be a financial crisis or capital flight out of China or a collapse in the renminbi exchange rate. Indeed, there have been no signs of capital flight; otherwise one should have seen a significant depletion in domestic deposits. The recent FX reserve losses have largely been a result of valuation effect and capital outflows stemming from Chinese companies repaying foreign debt and portfolio outflows.
However, there is no free lunch. The cost of sustaining the banking system under the prevailing policy framework is that many of the zombie companies would not be forced out of the system or restructure, despite Beijing’s pledge to improve corporate efficiency.
This means that China’s SOE reform would be a slow-going process, delivering only mediocre economic and productivity growth in the medium-term. But an “Armageddon” scenario is not a fair bet on China.
Can China Avoid a Banking Armageddon?
With expected losses of $3.5 trillion, BNP Paribas’ Chi Lo analyzes the banking sector’s worst case scenario.
April 6, 2016
Some market players believe that China would see a banking crisis soon, with losses expected to amount to USD3.5 trillion, or 30.4% of the banks’ total equity, or four times larger than the equity hit that US banks took during the subprime crisis. Recent reports that China had almost USD600 billion unpaid receivables, the largest amount since the late 1990s, only aggravated such fears.
To understand the rationale of this “Armageddon” scenario, one needs to know where the biggest risk exposure of the Chinese banks is. It is not the loans to the state-owned enterprises (SoEs) or the households. The former enjoys implicit guarantee from the government and the latter has a strong balance sheet.
The highest credit risk lies in the loans to the corporate sector and non-depository financial institutions (NDFIs). The latter include investment companies, brokerages, trust companies, auto-financing and financial leasing companies and private loan companies. They do not enjoy the same degree of implicit guarantee as the SoEs and the banks, and are not regulated properly.
Chi Lo, Senior Economist, BNP Paribas Investment Partners (Asia) Ltd.
According to banking and official data, loans to the enterprises and NDFIs totalled RMB79.4 trillion in 2015 (see Table 1), which accounted for 84.5% of total loans. Let us assume two loss scenarios, one with a 10% loss and the other with a 15% loss on these loans.
Official data shows that the banking system had an aggregate RMB2.3 trillion loan-loss provisions last year. Experience also shows that Chinese banks had an average bad-debt recovery rate of 20%. Assuming all the provisions would be used to cover losses and the same bad-debt recovery rate going forward, the potential net loss to the banking system would amount to RMB4.0 trillion and RMB7.2 trillion under scenario 1 and 2, respectively (see Table 1).
Chinese banks had an aggregate equity capital of RMB13.1 trillion in 2015. The stylised example here shows that if banks’ bad-loan ratios were to rise to 10% or 15%, the estimated losses could wipe out 31% to 55% of the banks’ aggregate equity.
The losses we have assumed here are arbitrary. If realised losses were lower/higher, the hit on banks’ equity would be lower/higher. Given the prevailing economic weakness in China, a 10%-15% non-performing-loan scenario looks plausible. There could also be bad debt arising from other loan categories.
Conventional wisdom has that China would be facing a banking and currency crisis soon. But this view hinges upon the creditors’ behaviour. In an open and matured market, which is how most western analysts seem to see China, the creditors would lose faith in the debtors and cut funding. The banking system would collapse, crushing the economy and the exchange rate.
However, the creditors in China are the households, who are ultimately backed up by the government’s implicit guarantee policy. So there is still no loss of public confidence. This also means that the probability of bank runs is very low. Meanwhile, China’s closed capital account helps lock up domestic liquidity, providing a backstop for keeping the banking system whole.
Even though the central government is calling for a clean-up of zombie companies, it is also asking banks to ensure the process does not cause any financial instability, i.e. not to cut off funding abruptly. Granted, this policy is not going to solve China’s debt and capital misallocation problems. But it means that China could avoid a financial implosion for longer than many analysts have expected.
So long as there is no loss of public confidence and the creditors in China do not cut off funding to the banks and NDFIs which, in turn, do not cut off funding to the zombie companies, there would not be a financial crisis or capital flight out of China or a collapse in the renminbi exchange rate. Indeed, there have been no signs of capital flight; otherwise one should have seen a significant depletion in domestic deposits. The recent FX reserve losses have largely been a result of valuation effect and capital outflows stemming from Chinese companies repaying foreign debt and portfolio outflows.
However, there is no free lunch. The cost of sustaining the banking system under the prevailing policy framework is that many of the zombie companies would not be forced out of the system or restructure, despite Beijing’s pledge to improve corporate efficiency.
This means that China’s SOE reform would be a slow-going process, delivering only mediocre economic and productivity growth in the medium-term. But an “Armageddon” scenario is not a fair bet on China.
Ultra
Junior Member
Chinese innovation? Are you kidding? I didn't know inventor of QR code is CHINESE. Nor is application of using it started in China. It is just that adaptation of the technology is more widespread in China. That's all.
Its called consumer innovation. Making existing technology better and more user friendly for the consumers.
Hendrik_2000
Lieutenant General
Why China's Housing Market Refuses To Crash
,
. In 2008, the that the “sizzle is off” China’s housing market and there were no improvement on the horizon. They then upped their ante in 2014, with an article entitled “.” Many other financial media sources have followed suit, predicting collapse both when the country’s housing market heats up and when it cools off.
But this just hasn’t happened yet. As the years roll on and successive proclamations of economic Armageddon go unrequited, China’s housing market remains not only afloat but, some could say, as strong as ever. The market heats up to a boil then cools off a little without ever crashing. So does this mean that China has had a housing bubble that has endured for over a decade? Or maybe there was ?
New housing in Xiamen, in Fujian province of China. Image: One of the main reasons that China’s real estate market has ultimately maintained stability in the face of regular bouts of seemingly over-inflated prices is that the central and local levels of governments are firmly at the helm. They have control over the supply of new land for construction, financing for development, mortgage policies, tax rates, as well as housing purchasing restrictions that they use like a thermostat to heat up or cool off the market at their discretion.There is a very good reason for this heavy hand. In China, real estate is responsible for 15% of GDP, 15% of fixed asset investment, 15% of urban employment, and 20% of all bank loans, . This isn’t something the government is going to leave to the whims of the free market.
“People know the government has to support the real estate market. If the real estate bubble bursts the entire economy goes bankrupt, and that’s the last thing the government wants to see,” said Cody Chao, a medical student in Suzhou whose family has invested heavily in housing.Recommended by ForbesWhen the market gets too hot, various levels of China’s government often ; when it gets too cool for comfort they loosen restrictions to heat it up again
.A long term graph of China’s housing market is a sine wave. At the peaks, when the market is blazing hot, and at the troughs, where it is much cooler, we see government policy which sends the market shooting back in the other direction. These tidal fluctuations occur roughly every two years, according to the Milken Institute.
Control of interest rates
One of the ways that China’s government influences the direction of the housing market is with interest rates. When they want to cool things down a little, the government charges higher interest rates on loans to developers and home buyers, when they want to heat the market up give more favorable rates.
At the end of a major housing market cool down in 2014, China’s central bank lowered interest rates six times to their lowest level ever. This provoked a swing in the market to the opposite direction in 2015, contributing to the feeding frenzy that we are currently seeing in some cities.
“Policy easing over the last 18 months has stimulated the market and led to a major boost in sentiment,” wrote Steven McCord from JLL. “Arguably, policies for home buyers are looser than at any time in the last ten years, surpassing even the major policy rollbacks of 2009. . . For home buyers, it is easier than ever to get a mortgage.”
Control of financing
One of the saving graces of China’s housing market, no matter how heated it has appeared, was that home buyers have always been extremely under-leveraged. At 90%, China has one of the world’s highest home ownership rates, but only 18% of the country’s households have mortgages.
“Previous upswings were not driven by leverage,” Joe Zhou, the Head of Research of JLL in Shanghai, explained. “In fact, previously, the norm was people did not finance the maximum allowable level. Therefore, mortgages did not play a role in driving up demand or prices.”
Recommended by Forbes
In large part, this lack of leverage is due to the fact that lending for home purchases are tightly controlled by China’s central and municipal level governments. Who qualifies for mortgages and how much financing they can receive is based on formal calculations which vary from city to city and are continuously adapted to suit current economic conditions.
At times when housing is more or less trading at a sustainable rate, someone buying their first property in China is required to make at least a 30% down payment, while their second home purchase requires 40-50% upfront, and any additional house beyond this must be paid for in full, as no financing is available. During periods when the housing market is exceedingly hot, policy requiring a higher down payment is often initiated; while during periods when the market is relatively cool, the minimum down payment can drop to as little as 20%.
For the most part, real estate speculation in China is done in cash, not loans, which creates an entirely different situation when it comes to the potential impact of “bubbles” than in most other countries. To put it simply, the conditions which caused the US’s housing crash of 2008 , as things like sub-prime mortgages and mortgage backed securities are either prohibited or are otherwise not very widespread.
This means that even in the event of a severe downturn in the housing market, a domino effect of defaults would probably not resound through the broader economy. Chengdu’s Southwestern University of Finance and Economics, on this and found that even if prices in China’s housing market were to plunge by 30% only 3% of households would become financially insolvent. While the Bank of China estimated that a similar drop and the broader effect would likewise be minimal. One of the keys to this stability is ultimately strict, government regulated lending controls.
Conclusion
China’s real estate market has induced confusion in many of the financial circles of the world due its seemingly volatile nature: prices rising to unsustainable heights just to drop a little before shooting back up again, over and over without ever really crashing. The fact of the matter is that an over-inflated housing market is one of the biggest cash cows the Chinese government has, so the last thing they want are plummeting prices. Taxes and fees can account for upwards of 60% of a house’s final price, not to mention the spoils that are derived from selling land to developers.
“With one hand on a patchwork of controls aimed at taming record house prices, governments with their other hand are at the same time selling land to developers at rising prices,” wrote for Reuters.
When looking at China’s housing market one key point to remember is that this isn’t really a free market and can’t be expected to behave like one. Behind the scenes are governmental ventriloquists pulling at proverbial strings, controlling supply and engineering just the right amount of demand.
Wade Shepard is the author of . He blogs at
,
. In 2008, the that the “sizzle is off” China’s housing market and there were no improvement on the horizon. They then upped their ante in 2014, with an article entitled “.” Many other financial media sources have followed suit, predicting collapse both when the country’s housing market heats up and when it cools off.
But this just hasn’t happened yet. As the years roll on and successive proclamations of economic Armageddon go unrequited, China’s housing market remains not only afloat but, some could say, as strong as ever. The market heats up to a boil then cools off a little without ever crashing. So does this mean that China has had a housing bubble that has endured for over a decade? Or maybe there was ?
New housing in Xiamen, in Fujian province of China. Image: One of the main reasons that China’s real estate market has ultimately maintained stability in the face of regular bouts of seemingly over-inflated prices is that the central and local levels of governments are firmly at the helm. They have control over the supply of new land for construction, financing for development, mortgage policies, tax rates, as well as housing purchasing restrictions that they use like a thermostat to heat up or cool off the market at their discretion.There is a very good reason for this heavy hand. In China, real estate is responsible for 15% of GDP, 15% of fixed asset investment, 15% of urban employment, and 20% of all bank loans, . This isn’t something the government is going to leave to the whims of the free market.
“People know the government has to support the real estate market. If the real estate bubble bursts the entire economy goes bankrupt, and that’s the last thing the government wants to see,” said Cody Chao, a medical student in Suzhou whose family has invested heavily in housing.Recommended by ForbesWhen the market gets too hot, various levels of China’s government often ; when it gets too cool for comfort they loosen restrictions to heat it up again
.A long term graph of China’s housing market is a sine wave. At the peaks, when the market is blazing hot, and at the troughs, where it is much cooler, we see government policy which sends the market shooting back in the other direction. These tidal fluctuations occur roughly every two years, according to the Milken Institute.
Control of interest rates
One of the ways that China’s government influences the direction of the housing market is with interest rates. When they want to cool things down a little, the government charges higher interest rates on loans to developers and home buyers, when they want to heat the market up give more favorable rates.
At the end of a major housing market cool down in 2014, China’s central bank lowered interest rates six times to their lowest level ever. This provoked a swing in the market to the opposite direction in 2015, contributing to the feeding frenzy that we are currently seeing in some cities.
“Policy easing over the last 18 months has stimulated the market and led to a major boost in sentiment,” wrote Steven McCord from JLL. “Arguably, policies for home buyers are looser than at any time in the last ten years, surpassing even the major policy rollbacks of 2009. . . For home buyers, it is easier than ever to get a mortgage.”
Control of financing
One of the saving graces of China’s housing market, no matter how heated it has appeared, was that home buyers have always been extremely under-leveraged. At 90%, China has one of the world’s highest home ownership rates, but only 18% of the country’s households have mortgages.
“Previous upswings were not driven by leverage,” Joe Zhou, the Head of Research of JLL in Shanghai, explained. “In fact, previously, the norm was people did not finance the maximum allowable level. Therefore, mortgages did not play a role in driving up demand or prices.”
Recommended by Forbes
In large part, this lack of leverage is due to the fact that lending for home purchases are tightly controlled by China’s central and municipal level governments. Who qualifies for mortgages and how much financing they can receive is based on formal calculations which vary from city to city and are continuously adapted to suit current economic conditions.
At times when housing is more or less trading at a sustainable rate, someone buying their first property in China is required to make at least a 30% down payment, while their second home purchase requires 40-50% upfront, and any additional house beyond this must be paid for in full, as no financing is available. During periods when the housing market is exceedingly hot, policy requiring a higher down payment is often initiated; while during periods when the market is relatively cool, the minimum down payment can drop to as little as 20%.
For the most part, real estate speculation in China is done in cash, not loans, which creates an entirely different situation when it comes to the potential impact of “bubbles” than in most other countries. To put it simply, the conditions which caused the US’s housing crash of 2008 , as things like sub-prime mortgages and mortgage backed securities are either prohibited or are otherwise not very widespread.
This means that even in the event of a severe downturn in the housing market, a domino effect of defaults would probably not resound through the broader economy. Chengdu’s Southwestern University of Finance and Economics, on this and found that even if prices in China’s housing market were to plunge by 30% only 3% of households would become financially insolvent. While the Bank of China estimated that a similar drop and the broader effect would likewise be minimal. One of the keys to this stability is ultimately strict, government regulated lending controls.
Conclusion
China’s real estate market has induced confusion in many of the financial circles of the world due its seemingly volatile nature: prices rising to unsustainable heights just to drop a little before shooting back up again, over and over without ever really crashing. The fact of the matter is that an over-inflated housing market is one of the biggest cash cows the Chinese government has, so the last thing they want are plummeting prices. Taxes and fees can account for upwards of 60% of a house’s final price, not to mention the spoils that are derived from selling land to developers.
“With one hand on a patchwork of controls aimed at taming record house prices, governments with their other hand are at the same time selling land to developers at rising prices,” wrote for Reuters.
When looking at China’s housing market one key point to remember is that this isn’t really a free market and can’t be expected to behave like one. Behind the scenes are governmental ventriloquists pulling at proverbial strings, controlling supply and engineering just the right amount of demand.
Wade Shepard is the author of . He blogs at
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solarz
Brigadier
Why is Steve Jobs considered innovative then? All he did was adapt existing technology: GUI, mp3 player, cell phone. He didn't invent anything either.
AssassinsMace
Lieutenant General
"Innovation" is a term that its definition floats around. I've mentioned before how Amazon's idea for drone delivery was proudly called "innovative." Amazon didn't invent drones nor did it come up with the idea first. A European and Chinese company were already toying with it? Now what was a general term is now divided into categories. Why? To make other's achievements less? Amazon's drone delivery was celebrated as this great innovation. Now that they've come up with these categories... not so much now by their own standards.
A Milestone-Alibaba of China Overtakes Wal-Mart as World's Largest Retailer
Chinese E-commerce giant Alibaba Group has officially become the world's largest retailer, with its gross merchandise volume (GMV) surpassed three trillion yuan, or 475.89 billion dollars, in the last financial year ending in March.
This means the world's largest retail market place has shifted from offline to online. Traditional offline retail giants like Wal-Mart and Costco have been outperformed. Walmart posted revenue of 482.1 billion dollars in the recent fiscal year.
Alibaba was born in a time of data technology. Its growth has mainly been supported by new technologies like big data, cloud computing, online payment and credit systems, as well as smart logistics.
By applying these technologies, Alibaba managed to create a platform that allows online and offline businesses to co-exist.
Currently, a new real economy based on new technologies is expanding.
Alibaba's next target is to reach six trillion yuan (926.4 billion dollars) in transaction volumes by 2020 and to improve efficiency for retailers. In this way, they will push forward commercial reforms with new technologies.
Alibaba's CEO Zhang Yong said more and more retailers are embracing E-commerce and that Alibaba will keep building the online platform for their partners.
Chinese E-commerce giant Alibaba Group has officially become the world's largest retailer, with its gross merchandise volume (GMV) surpassed three trillion yuan, or 475.89 billion dollars, in the last financial year ending in March.
This means the world's largest retail market place has shifted from offline to online. Traditional offline retail giants like Wal-Mart and Costco have been outperformed. Walmart posted revenue of 482.1 billion dollars in the recent fiscal year.
Alibaba was born in a time of data technology. Its growth has mainly been supported by new technologies like big data, cloud computing, online payment and credit systems, as well as smart logistics.
By applying these technologies, Alibaba managed to create a platform that allows online and offline businesses to co-exist.
Currently, a new real economy based on new technologies is expanding.
Alibaba's next target is to reach six trillion yuan (926.4 billion dollars) in transaction volumes by 2020 and to improve efficiency for retailers. In this way, they will push forward commercial reforms with new technologies.
Alibaba's CEO Zhang Yong said more and more retailers are embracing E-commerce and that Alibaba will keep building the online platform for their partners.