I have been following the situation in China passively, catching up on a few articles and reading a few fund letters like Kyle Bass
And its been posted here a few times too…
The overall narrative on Chinese debt is that the government is implementing tough sanctions and really curbing in the debt…
Recent NYT’s headlines reads “With Jail Sentences and Corporate Flameouts, China Is Tackling its Debt”
The thing to remember though is that China has created a system which relies on debt to function. From local government officials to Xi himself, everyone needs debt to keep the system moving. This makes it almost impossible to stop. So where does it go if the loan to value ratios are looking better after these “tough sactions”:
They are hidden.
There are noticeable parallels between this situation and the 2017 Well’s Fargo sales scandal.
WF’s gave it’s sales teams impossible targets and said they would be punished very severely if they failed.
But instead of hitting the impossible targets, the sales teams just fudged the numbers to keep the show on the road. No sales rep anted to be caught out, so they just lied. When every sales rep lies it’s not a small problem, it becomes mass fraud..
When the management realised what was happening, it was too late and damage had been done…
I am stating there is a high possibility that Chinese companies, banks, and local government are gaming the system and staying ahead of regulators.
One example of this is the Wealth Management Products being pushed by Alibaba, JD and Tencent. WMPs aren’t innovative investments, they are NPLs taken off balance sheet, brought into shadow banking system and marketed as high-quality investments to Chinese users.
Let’s say a bank hypothetically moved their bad loans into WMPs, they could clean up their balance sheet and NPL ratios. In fact, this would be the logical move under stringent government pressure and it would make it look like the problem has gone. But the core problem is still there, the only difference is whose going to pay for it.