China’s Trust Bombs Exploding (That’s Shadow Banking Trusts)
Each week there’s a new spin coming out of China. One minute the hard landing is imminent, the next, the worst has past. My bet from watching China pretty closely over the past 7 years or so, is that we are far from a bottom in China. The country right now reminds me of early 2008 USA with everyone knowing that things were turning very nasty, but hoping that things wouldn’t get as bad as it looked like they might.
China’s economic system has been driven for years, decades, by declarations from on high. However, this can only work for so long. The misallocation of capital which comes with such a system is unsustainable.
This is not to say that the long term prospects for China aren’t good. They are. But the ultimate crony capitalist state isn’t going to just rocket into the 1st world as many in the West have predicted.
Check out this video from 1 year ago to see an excellent example of what is really going on in China economically. Remember, this was a year ago.
The “shadow banking” trusts in China are exploding right now, and leaving craters all over the economy.
This is not good for a world which was hoping that China might pull it out of the ditch. Everything is looking like a ditch right now.
“The heyday of trusts is gone, and now they’re left with quite a few land mines to navigate,” said Ivan Shi, a Shanghai- based analyst at consulting firm Z-Ben Advisors Ltd. “Surviving the peak of repayment next year is probably the biggest challenge as we know many projects are dodgy.”
Trusts need to repay investors about 250 billion yuan in principal and return on property-linked investments this year, and an estimated 310 billion yuan more will come due in 2013, according to CICC. Issuers may be forced to extend payment deadlines, sell new trusts to pay off old ones or dispose of collateralized assets, the firm said.
“Nobody knows exactly how much obligation the sector has accumulated, but we know for sure the debt must be paid one way or another,” Shi said, adding that trust firms will have to step in to honor those debts if borrowers including property developers fail to make payment.