Let’s Buy Sweden and Put it on our Front Lawn
Or rather, let’s not. As Bloomberg reports, the officially admitted to amount of bad loans in China’s banking system has by now swelled to approx 4 trillion yuan, or $628 billion, which is roughly equivalent to Sweden’s total economic output per year.
Sweden is a small, but highly developed country which exhibits astonishing rates of monetary and credit inflation at present. It has slightly less than 10 million inhabitants, and its ‘GDP per capita’ on a purchasing power parity basis amounts to approx. $44,000 compared to $12,600 in China. We are mentioning this to make clear that such comparisons have to be put into proper perspective.
Annualized loan growth of China’s banking system. After the huge post GFC surge in bank lending (the government essentially ordered the large state-owned banks to expand credit willy-nilly) it has slowed to a still quite extraordinary 14.4% as of October.
In short, bad loans equal to the GDP of Sweden still represent a very low NPL ratio of just 5.5% – and this is including so-called ‘special mention’ loans, which are dud loans that are held not to be complete write-offs just yet, primarily based on assorted extend & pretend schemes. In China this method of masking the extent of bad loans is called ‘evergreening’ loans. Naturally, everything is done to hide the true extent of deterioration, but this is by no means unique to China.
For instance, the successfully ‘stress-tested’ banking systems of Europe’s peripheral countries are weighed down by staggering amounts of dud loans as well, but extend & pretend is the order of the day everywhere these days. Based on official data and the relative sizes of their economies, the banking systems of countries like Spain and Greece are for the time being in a far worse position than China’s. In Sweden the credit bubble sun is still shining, but when (not if) its credit and real estate bubbles burst, it is highly likely to become the next Spain.
But what about China? Chinese data generally have to be taken with a big barrel-full of salt. A great many ancillary data that describe economic activity, such as electricity consumption, cargo traffic or steel prices belie official GDP growth rates. In fact, if all we knew were those ancillary data, we would never suspect GDP to be growing at all, let alone at a rate of 6.9%. Of course, one must never lose sight of the fact that GDP is a quite useless statistic to begin with. We have discussed this on several occasions (readers may want to check out ‘The GDP Illusion’ and ‘The Mirage of Economic Growth’ for details). In the words of Oscar Morgenstern: ‘[T]here is real trouble with the basic underlying notion of GNP. It is not an acceptable scientific concept for the purposes it is used’.
This post was published at Acting-Man on November 20, 2015.