Anyone who thinks China’s troubles are over, is in for a rude awakening. If anything, China’s troubles are set to deepen even further in the coming Weeks/Months. With a Crumbling Economy + Rampant Inflation + Rise in NPLs + Banks/Companies Defaulting on Their Debt + Soy Sauce… It’s a no win situation, as majority of the Chinese cash is parked in Illiquid Assets and Real Estate. The system works, until it doesn’t.
Here’s what I mean by that:
Given that almost a 100% of these Illiquid Assets are linked to various Credit/Debt Instruments, when the Chinese economy starts crumbling in full throttle, expect more and more companies to file for Bankruptcy, resulting in a domino effect which will have far reaching effects beyond the Great Wall of China.
With all the Overnight Millionaires/Billionaires in China parking their cheap cash in Real Estate, there is no surprise that China’s Real Estate prices have soared in a very short period of time. If and when China’s Real Estate Bubble Implodes, the current liquidity crisis would look like amateur hour. China will come to a complete stand still. Stagflation. It’s gonna be EPIC. At which point, the PBOC will have to choose whether it wants Economic Growth or Lower Inflation. You can’t have both at the same time. Something’s gotta give.
As Bloomberg Report’s:
Chinese banks’ bad loans increased for a sixth straight quarter, the longest deterioration streak in at least nine years, as economic growth slowed.
Non-performing loans climbed by 33.6 billion yuan ($5.5 billion) in the three months ended March 31, to 526.5 billion yuan, the China Banking Regulatory Commission said in a statement on its website today. Soured debt rose across all lender categories, including state-owned and regional banks.
China’s banking system is grappling with higher defaults and slowing profit growth as regulators ease control over banks’ loan pricing and deposits to spur competition. Net interest margin at the nation’s 3,800 lenders contracted to 2.57 percent in the first quarter from 2.75 percent in preceding period, the regulator said.
Economic growth has also moderated, with expansion at 7.7 percent in the first quarter, trailing the median forecast for 8 percent in a Bloomberg News survey and slower than the fourth-quarter expansion of 7.9 percent. The government in March set a 2013 economic growth goal of 7.5 percent, the same target as last year.
The non-performing loans ratio for Chinese banks rose to 0.96 percent at the end of March from 0.95 percent at the end of last year.
Long Story Short: Expect China to keep bombing the tape and be the focus of attention in the coming weeks/months. Volatility will be high, hence it is recommended that you stay away from EMs.