China’s Enrons – Forbes
Whether they cooked the books or not, Chinese bankers have a lot to hide. To avoid the effects of the global downturn, Premier Wen Jiabao, beginning at the end of 2008, made the banks go on a spree by forcing them to abandon lending standards. That permitted China to bulk up on “ghost cities,” towering government offices in rural villages, and magnificent airports in the middle of farmland. Even after central officials supposedly reined in the loan-a-thon in 2010, lending has continued at a fast pace: new loans were up 23.7% in Q3, compared to the same quarter last year.
As a result of this “directed” lending, the banks are now carrying “assets” that cannot, in the normal course of business, be paid back. “The Mother of All Debt Bombs” is how Minxin Pei of Claremont McKenna College characterizes the risky situation. Chanos puts it this way: “Imagine a credit python,” he said. “The U.S. is the pig at the end of the snake, and China and Asia are the pig entering the snake in terms of deleveraging the banks.”
“The worst fears of a collapse in China’s banking system are misplaced,” writes Tom Orlik of the Wall Street Journal. In a sense, he is right because Beijing will, as long as it has the resources, not let its banks fail. Chinese officials will make sure borrowers, and especially the infamous Local Government Financing Vehicles, have cash to service interest; they will use their reserves of foreign currency to partially recapitalize the banks, as they did last decade; they will maintain loose standards for the evaluation of loans for NPL accounting purposes; and they will force regulators to issue deceptive statistics about the health of the banks.
In the late 1990s during China’s last downturn, this general approach worked to avoid a crisis. Dai Xianglong, when he was governor of the People’s Bank of China, downplayed concerns about China’s banks and told the public that the industry’s NPL ratio was no more than 1%. At the time, analysts thought the ratio was closer to 25% and later estimates topped 50%. Yet Beijing, through a series of partial measures over the course of a half decade, eased the banks out of crisis.
Now, the banks are clearly in trouble again. For one thing, they are avoiding making long-term loans, a sign of funding difficulties, probably caused by the nonperforming assets they have been carrying on their balance sheets.