Wednesday, February 8, 2017 - China Facing a Catch 22?

There are a lot of reasons to keep an eye on China. Trump is likely to have some confronations with China on a variety of fronts. Jim Rickards has predicted a significant currency event (possible steep yuan devaluation) will take place this year related to China. Here is another issue to keep an eye on in this recent article in Below are a couple of excerpts from the article.


"A subsidiary of the Industrial and Commercial Bank of China (ICBC), the world’s largest bank, has recently reached deals with seven Chinese state-owned enterprises to convert about 60 billion yuan ($8.7 billion) of unpaid loans into equity shares.

. . . . . . 

"The news about debt-for-equity swaps and China’s claims to be over the worst of its corporate debt problems all sound good until one remembers this.
In October 2016, the Bank for International Settlements (BIS) reported that China’s corporate debt was 121 trillion yuan, roughly 169 percent of China’s GDP.
The IMF also noted the problem wasn’t simply a high rate of growth in Chinese corporate debt since the 2008 financial crisis. It’s the fact that corporate profits have steadily declined since 2009, while the leverage ratio has increased.
One of the obvious side effects of such unrestrained credit growth is a rise in non-performing loans (NPLs). China currently reports NPLs at 1.7 percent of total loans. But we have always taken Chinese statistics with a grain of salt.
We think the true figure was somewhere between 3 and 7 percent.
But the IMF report suggests the number of loans at risk of default is much higher. It estimates that non-performing and special-mention loans have risen above 5 percent. Meanwhile, loans potentially at risk account for 15.5 percent of all commercial bank loans to the corporate sector."
. . . . .

Added note: When I forwarded a link to this article to Jim Rickards he replied to let me know he had seen another similar article and sent me this link and said to continue to keep an eye on China:

2-9-17 addtional note: This article appearing on CNBC suggests that Trump and China are still in the early stages of trying to figure out how to work with each other. It appears Trump may be dialing back from some of his earlier strong rhetoric on China. The article says Trump has held off on some of the actions that might have led to early conflict so far that some were expecting him to do.

2-10-17: More evidence Trump is walking back some of his earlier sharp rhetoric on China in this article

As time goes by we are perhaps learning more about how Trump works. He may be learning that some things in geopolitics cannot be used like bargaining chips as he is used to in business dealings. So far he has avoided some things Jim Rickards pointed out could lead to sharp conflict with China that some had thought he was ready to move forward with. For example, he has not yet formally called China a currency manipulator and now he has backed off on his comment that he might not accept the One China policy.

2-13-17: Chinese are happy to see Trump soften his stance on China- China Daily

1 comment:

  1. Essentially, it sounds like their sovereign wealth fund, the IBC, is exercising convertible bonds into preferred stock and taking larger ownership of 7 industrial companies.