China's debt dragon

Disguising debt

March 2004, official statistics reported non performing loans represented 19 per cent of bank loans. Standard and Poor’s however, estimated NPLs as high as 45 per cent. This represented serious risk for China's savings.

To reduce NPL levels, the "non-performing" classification no longer applies to hundreds of billions of risk loans that now come under the new classification of "special mention". Perhaps researchers should apply greater due diligence and clarify interpretation to "special mention" classifications when dealing with China's debt and capital raising.

The unknowns

If the AMC's have offloaded the "junk" majority of their NPLs disguised as wealth generation packages, which corporate, local government, state institutions and pension funds balance sheets now incorporate these toxic assets.

What percentage of borrowing security underwriting infrastructure, property and stock markets do these repackaged NPLs now represent?

The CBRC will not release its report in full on its investigation into the effects of local government debt until after the current banks capital raisings.

While the level of new NPLs and bad debt resulting from the 2009 stimulus and first half 2010 lending sprees are unknown, keep in mind that NPLs from this period have no asset management company or guarantee support.

Other debt

Despite being China’s biggest single borrower, China’s Aviation Industry Corp (AVIC) provides no details or repayment plans for borrowings.

China Development Bank's substantial foreign loans to developing nations are mainly reliant on counter trade in energy and minerals. A decline in demand due to a sliding China economy will not only delay payment, but will undermine the economies of countries reliant on China's largesse and demand for minerals.

China's Import Export bank also has major risk in developing countries.

China’s US$200 billion sovereign wealth fund, CIC, has suffered spectacular losses on Blackstone and Morgan Stanley. Subsidiary, Central Huijin Investment paid US$47 billion in 2008 to reduce debt for a 50 per cent interest in Agricultural Bank and pumped billions of dollars into the China Development Bank. CIC's earnings target of US$41 million a day is still a distant dream.

China's banks with branches in developing nations to fund Chinese companies operating in those countries are experiencing increasing risk from rising anti Chinese sentiment and civil unrest.

The 5th AMC

Huida Asset and Trustee Co was the AMC appointed to dispose of the Central Bank's bad debts and assets. Reporting on Huida activities has ceased due to the perceived effect on the standing of China's central bank.