Yet more concerns over loose lending standards in China
This is must be the umpteenth time I’ve written to date on ominous signs in China’s financial landscape startlingly similar to that America faced before its worst recession since the 1930s. For a sample of what was posted on this previously, see here and here and also here. The WSJ reported that China’s top newspaper called for stronger regulation over lending standards:
SHANGHAI—The People’s Daily newspaper has warned China’s banks about the risks of loans they are pouring into state infrastructure projects, calling into question the safety of billions of dollars of debt backed by local governments around the country.
China’s banks have unleashed massive credit this year following a government order to help finance public works construction aimed at pumping up the domestic economy. But banks should not assume that such loans, backed by local governments, are risk-free, the Communist Party newspaper said in a commentary on Monday.
Most of the lending goes to railroad, highway and airport building projects that eventually are handed over to local governments to manage, and it’s the local authorities — not central government — that will guarantee loan repayments, it said.
Banks often lack accurate and full information about local governments and their financial viability, increasing their credit risks, it said. Lenders’ asset quality undoubtedly will suffer if local governments later find themselves in financial trouble, it said.
“In the short run, it appears that [stimulus lending] is risk-free. But in the long term, there are some local government projects that may not yield high returns and the payback could be due long into the future. Such projects may not generate enough cash flow for either the principal or interest payments,” the paper said.
If this story sounds eerily familar it’s was a lack of strong regulatory standards over lending in America (ie. so called “predatory lending”) which led to subprime loans which in turn brought down mortgage securities when they (unsurprisingly) defaulted. Who is to say all the excess liquidity couldn’t possbily cause a similar financial crisis to occur in China? In a previous post, the Bernanke thesis was invoked to explain the origin of the American financial crisis. Now it seems history may be doomed to repeat itself if cautioned is not exercised. Think financial regulatory standards are loose in America? How about China then, where corrupt officials are commonplace?
All of this should be worrying for Singaporeans, where one of its sovereign wealth funds Temasek Holdings bought into a major state-owned Chinese bank. As mentioned before, in a bid to buy up supposedly stocks before they rise in value, Temasek sold its Barclays and BofA stake in a fire sale which led to losses of several billion USD. Are they poised to lose billions again when the Chinese financial bubble (if there is one) comes crashing down?