China's Year of the Bear?

Image Source: National Museum Australia.

Bloomberg's William Pesek reports that financier George Soros is predicting a crash of the Chinese economy. Will this be the Year of the Bear in China, rather than the Year of the Horse?

Image Source: Next Big Future.

One of China's problems lies with shadow banking entities. Like many things in the new Millennium, there are two realities at play. China has a state-controlled banking system and a coexisting unregulated banking system. The interaction between the two allows China's economic success story to play out before the world, while an enormous credit bubble expands off the books:

George Soros probably shouldn't expect any warm invitations to Beijing -- not with the much-reviled short seller warning of a giant Chinese crash. ... In a Jan. 2 op-ed for Project Syndicate, Soros didn't say whether he's shorting China. But he did connect the dots in a way that can't make President Xi Jinping happy. To Soros, the main risk facing the world isn't the euro, the U.S. Congress or a Japanese asset bubble, but a Chinese debt disaster that's unfolding in plain sight.

“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years," Soros wrote.

Xi would be negligent to ignore Soros's warnings. He's hardly alone: Peking University professor Michael Pettis and Jim Chanos of Kynikos Associates have been beating this drum for years. Silvercrest Asset Management's Patrick Chovanec worries about a “shadow” Chinese balance sheet that would be keeping policy makers awake around the globe, if Beijing's obsessive opacity weren't concealing the problem. (You can read his latest concerns in this Jan. 3 Bloomberg View op-ed.)

China would never admit to basing policy on outsiders' warnings. Still, it's interesting to see the flurry of official Chinese moves this week aimed at reining in the shadow banking sector. On Monday, for example, China’s Cabinet imposed new controls on the multitrillion-dollar sector, targeted off-the-books loans, and promised to beef up enforcement of current rules.

I'm thinking we need to call this industry what it really is: China's answer to Enron. The Houston-based Enron's real business wasn’t energy and commodities, but book-cooking. The same holds true for China's shadow-banking entities. They are the fuel Beijing uses "to restart the furnaces," without attracting the notice of Moody's, Standard & Poor's or the U.S. Treasury Department.

China's financial system is the ultimate black box. You don't have to be a genius to conclude that when JPMorgan Chase estimates shadow banking to be 69 percent of China’s 2012 gross domestic product, it's a wildly conservative guess. I wouldn't quite add a zero, but if China fudges trade and other run-of-the-mill data, you can imagine the lengths to which it goes to hide the magnitude of its credit bubble.

"There are some eerie resemblances with the financial conditions that prevailed in the U.S. in the years preceding the crash of 2008," Soros wrote. "But there is a significant difference. In the U.S., financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises." He added: "How and when this contradiction will be resolved will have profound consequences for China and the world."

The problem, as economist Stephen Roach sees it, is China's propensity for thinking that slogans are sufficient. There is an inherent disconnect between lofty pledges of economic reform, sustainable growth and public accountability, and Xi's repeated assurances that China can grow north of 7 percent a year. China can either restructure its economy or grow rapidly -- it can't do both. Bottom line, the higher China's growth rate, the less retooling that's going on and the more debt the nation is amassing behind the scenes.

There are nay-sayers who argue that China already has the world's largest economy and disagree with Soros's warnings. He began predicting a Chinese crash in 2011, claiming China's problems would start in Greece.

The economy is a barometer of confidence about what is real and what is not. Debt can be sky high in China, but the impact of that debt might not be felt until the moment when the People's Bank of China and the media puncture the shadow economy's alternate reality bubble. Thus, the media become key players in building the perception of China's economy, as opposed to spreading news on the reality of China's economy.

Image Source: Info Awareness.

Another aspect of China's economy is the migration of western capitalist corporations to China, raising the question of whether systemic capitalist problems migrate too. This is an intuitive view, taken by the Activist Post, which asked in 2010: Is Communism the New Capitalism? Six Fortune 500 Companies Move HQ to China. One American right-wing commenter believes: "China is becoming more Capitalist, and we are becoming more Communist."

As simple as these assumptions are, China's future reflects whether they are right or not. How western is the Chinese economy? Will it behave in a unique way, or is it subject to the same pitfalls as western economies? One commenter on Bloomberg's Soros story says: "Soros is badly wrong. The mistake he and other china 'shorters' make is in thinking its financial system, markets and govt are like the west." Another responds: "And china bulls make the mistake of thinking that somehow china is different.....that the tried and tested rules of economics don't apply to them." China combines regulated and unregulated economies in a weird hybrid of communism and capitalism. From Zero Hedge blog in November 2013:

[W]hile China's debt - an arcane mixture of public, private, and pseudo-government backstopped credit - is among the biggest in the world, the one outstanding question was how much longer can China keep sweeping the hundreds of billions if not trillions of discharged, bad loans under the carpet and pretend everything is fine. Today we get some much needed perspective on this topic courtesy of Bloomberg, which has some very disturbing revelations. ... In summary: enjoy the relative calm we currently have thanks to Bernanke's, Kuroda's (and soon: Draghi's) epic liquidity tsunami which is rising all leaking boats. The invoice amounting to trillions in bad and non-performing loans around the entire world, and not just in China, is in the mail.

The picture of corporate debt as a percentage of GDP in November 2012 (click chart to enlarge). Image Source: Zero Hedge.

Other reports:

• CNN (29 March 2013): Is China Buying Up Africa?:  "The world's second superpower is pouring billions of dollars into Africa, running oil and mining firms all over the continent. China is constructing everything from roads and bridges to stadiums and important government buildings. The headquarters of the African Union, perhaps the most important political building in Africa, was built entirely with Chinese money, to the tune of $200 million. And while China is aggressively investing in Africa, the U.S. appears to be sitting on the sidelines. China has passed the U.S. to become Africa's biggest trading partner. Xi Jinping became China's new leader just two weeks ago and right now Xi is in Africa as one part of his first trip abroad as president. Africa is the world's fastest growing market and has the world's richest mineral reserves, so obviously there's money to be made. But do the Chinese want more? Some argue that this is a new form of colonialism – a repeat of Africa's hated past. Nigeria's central bank governor recently said, 'China takes our primary goods and sells us manufactured ones. This was also the essence of colonialism. Africa is now willingly opening itself up to a new form of imperialism.'"
• Financial Post (21 June 2013): World Faces 'Perfect Storm' as Liquidity Dries Up: "'I am extremely concerned about China,' said Lars Christensen from Danske Bank. “They are overdoing it and are on the verge of making the same mistake as the Fed and the European Central Bank before the Lehman crisis in 2008, when they failed to see how much the economy was slowing.' Mr Christensen said the world now risks a 'perfect storm' as the Fed prepares to taper its bond purchases (QE) at the same time as tightening the spigot of worldwide dollar liquidity. The twin effects are cascading through emerging markets, pummelling commodity exporters such as Brazil, South Africa, and Russia that sell to China, but also tripping up Turkey, Ukraine, Hungary, and others that rely on external funding. 'Everything is being hit indiscriminately,' said Neil Shearing from Capital Economics."
• FT (24 June 2013) China Stocks Fall into Bear Market Territory: "China's seven-day bond repurchase rate - a key gauge of liquidity - jumped as high as 28 per cent last week, which analysts said was a sign of a stand-off between the country's commercial lenders and its central bank. Many Chinese banks are heavily exposed to the shadow finance system, which authorities want to bring under control."
• FT (24 June 2013) China's Stocks Extend Bear Market as Minsheng Bank Falls: "China's stocks fell, deepening their slump into a bear market amid concerns elevated money-market rates will worsen the country's economic slowdown."
• Financial Post (24 June 2013) China Stocks Plummet Most in 4 Years into Bear Market: "China’s stocks fell the most in four years, as the CSI 300 Index entered a bear market after the central bank signalled it will maintain efforts to curb speculative lending and Goldman Sachs Group Inc. said a cash squeeze is hurting growth."
• CNBC (29 June 2013) Why China's Economy May Be Heading for a Crash: "'They launched $2.5 trillion worth of stimulus in 2008-11,' explained Bill Smead, CEO and CIO of Smead Capital Management and a long-term China bear. 'Most of that went to special purpose vehicles to build rail, bridges, airports, condo buildings, you name it.' Many of those projects were built with the sole purpose of showing strong economic growth and not to generate economic rent, Smead said. Gordon Chang, author of The Coming Collapse of China, said China may only be growing 2 or 3 percent and if you strip out all the construction going into ghost cities and 'high-speed rail lines to nowhere,' the economy may not be growing at all. He looks at electricity usage as a better indicator of growth than the official Chinese statistics."
• International Business Times (27 July 2013): China's Economic Hard Landing: Think Twice Before Gloating Over China's Slowdown: "[T]he reality is that a major Chinese economic slowdown could spark a crisis of monumental proportions, damaging every economy in the world, and the Chinese government has yet to show how it will prevent that from happening. After overseeing what may well have been the fastest growing economy in human history, China is trying to come to terms with how to manage its inevitable slip -- to minimize the damage while putting in place structural reforms involving improvements in tax and exchange rates and minimizing cozy government relationships with companies to enable long-term recovery and sustainability. No one knows if they will succeed, and the stakes are high -- for everyone."
• CNN (4 September 2013) China on Verge of Worst Economic Crisis in Decades: "Back in 2001, Goldman Sachs’ Jim O’Neill coined the term BRICs to describe the key fast growing developing economies of Brazil, Russia, India and China. But a dozen years later, is the focus on the BRICs misplaced? Indeed, is the group 'broken,' as Morgan Stanley’s Ruchir Sharma has suggested? 'Although the world can expect more breakout nations to emerge from the bottom income tier, at the top and the middle, the new global economic order will probably look more like the old one than most observers predict,' Sharma wrote earlier this year. 'The rest may continue to rise, but they will rise more slowly and unevenly than many experts are anticipating. And precious few will ever reach the income levels of the developed world.' ... The biggest short-term risk is financial overleveraging.  Thanks to its decade-long credit boom, the Chinese economy as a whole is far more leveraged (indebted) than any of the major emerging market economies. Net domestic credit as a share of GDP is close to 140 percent in China, compared with roughly 90 for Brazil, 75 for India, 60 for Turkey, and 35 for Indonesia. To make matters worse, most of the debt is owed by state-owned companies, real estate developers, and local governments that are known for wasting capital on financially unprofitable investments. For now, the bad debts incurred by these borrowers are not recognized on the balance sheet of Chinese banks, which are ordered by the Chinese government to roll over these loans. Estimates of bad loans hidden in Chinese banks vary, due to the opacity of the Chinese financial system. The most conservative estimates suggest they are around 10 percent to 15 percent of GDP. If that is true, the Chinese banking system is technically insolvent."
• Oil Patch Asia (9 September 2013): China Shifts Buying from Africa to Middle East, Russia: "China has replaced Africa crude with Middle East oil. Only the U.S. buys more oil than China. China is also buying more crude from Russia ... . The global tanker fleet has felt the impact of the buying change, which has shortened delivery routes to China. ... The U.S., meanwhile, is buying 12 percent less crude than a year ago because of increases in domestic production rises to the highest levels since 1989, according to Energy Department data."
• CBC (12 September 2013) Why China is Making a Big Play to Control Africa's Media: "From newspapers and magazines to satellite television and radio stations, China is investing heavily in African media. It’s part of a long-term campaign to bolster Beijing’s 'soft power' – not just through diplomacy, but also through foreign aid, business links, scholarships, training programs, academic institutes and the media. Its investments have allowed China to promote its own media agenda in Africa, using a formula of upbeat business and cultural stories and a deferential pro-government tone, while ignoring human-rights issues and the backlash against China’s own growing power. The formula is a familiar one used widely in China’s domestic media. It leads to a tightly controlled pro-China message, according to journalists and ex-journalists at the Africa branch of CCTV, the Chinese state television monopoly that owns China International Television and launched a new headquarters in Nairobi last year."
• The Diplomat (20 September 2013) China's Southern European Spending Spree: "[A] growing number of Chinese investors have also been taking advantage of the drop in Portuguese property prices by buying new luxurious apartments in Lisbon’s best districts. The Portuguese government is trying to attract this investment as well by offering Portuguese citizenship to any Chinese willing to invest a minimum of US$800,000 in the country. The 'Golden Passport' plan is attracting an increasing amount of Chinese companies and private citizens to buy real estate and set up offices in the country. Chinese businesses have also expressed interest in acquiring several struggling vineyards and olive farms in southern Portugal too. This makes sense since China is quickly emerging as one of the world's major destinations for European wine exports. Meanwhile, over the past two years, Chinese state-owned enterprises (SOEs) have been acquiring major shares in strategic sectors of the Portuguese economy, such as the water, electricity, and communications industries." 
• The Telegraph (November 2013) The Chinese Spending Spree Turning the UK Red: Photos of Chinese-acquired properties in the UK.
• Naked Capitalism Blog (13 November 2013) Randy Wray: What If China Dumps US Treasury Bonds?: "Our deficit hysterians love to raise the specter of China. Supposedly Uncle Sam is at the mercy of the Chinese, who have a stranglehold on the supply of dollars necessary to keep the US government above water. If the Chinese suddenly decided to stop lending those scare dollars, Uncle Sam would be forced to default. ... [T]he Chinese wouldn’t hurt us if they dumped our bonds – in fact, it would probably be good for the United States. But, you say, wouldn’t that send interest rates up and depress the American economy? I’ve been writing about this issue a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work. Think about it: China’s selling American bonds wouldn’t drive up short-term interest rates, which are set by the Federal Reserve. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy up those bonds. It’s true that such actions could possibly depress the value of the dollar. But that would be good for America! Right! Again, I doubt any significant dollar appreciation will occur. The US, as a sovereign currency issuer, faces no financial constraint. It cannot be forced into default. It controls its policy interest rate. The rest of the world are users of the dollar, not issuers. They can never hold us hostage."
• Bloomberg (20 November 2013) PBOC Says No Longer in China's Interest to Increase Reserves: "The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation. ... The yuan has appreciated 2.3 percent against the greenback this year, the best-performance of 24 emerging-market currencies tracked by Bloomberg. ... 'It appears that many in the People’s Bank think the time is about right to scale back currency interventions,' Mark Williams, London-based chief Asia economist at Capital Economics Ltd., wrote in an e-mail yesterday. 'But China has got itself into a situation where stopping intervention will be very hard to do.'"
• Reuters (26 November 2013) How China Took Control of an OPEC Country's Oil: On China's buying spree: "China's aggressive quest for foreign oil has reached a new milestone, according to records reviewed by Reuters: near monopoly control of crude exports from an OPEC nation, Ecuador."

Image Source: Zero Hedge.

• Zero Hedge Blog (26 November 2013) How China Humiliated the World's Central Banks: "The concept of the 'liquidity trap' is well-known to most: it is that freak outlier in an otherwise spotless Keynesian plane, when due to the need for negative interest rates to boost the economy (usually resulting from that other inevitable Keynesian state: the bursting of an asset bubble) - a structural impossibility according to most economists although an increasingly more probable in Europe - central banks have no choice but to offset a deleveraging private banking sector and directly inject liquidity into the banking sector with the outcome being soaring asset prices, and even more bubbles which will eventually burst only to be replaced with even more failed attempts at reflation. Sadly, very little of this liquidity makes its way to the broad economy as the ongoing recession in the developed world has shown for the 5th year in a row, which in turn makes the liqudity trap even worse, and so on in a closed loop. ... In order to offset the lack of loan creation by commercial banks, the 'Big 4' central banks - Fed, ECB, BOJ and BOE - have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world 'Big 4' central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse. How does this compare to what China has done? As can be seen on the chart [above], in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined! And that is how - in a global centrally-planned regime which is where everyone now is ... [you] flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it's really done." 
• Bloomberg (23 December 2013) Russia Crisis Haunts Deutsche Bank's Smith Seeing China Bust: "'There is potential for a debt trap in industrial companies which can trigger an economy-wide financial crisis as early as next year,' Smith said in an interview from London on Dec. 12, a day after he issued a report predicting China’s slowdown will lead to a 10 percent decline in emerging-market stocks next year. 'If I am wrong on China, I am wrong on everything.'"
• Sydney Morning Herald (30 December 2013) China Tries to Deal with its Mountain of Debt: "China's financial system is in danger of becoming too big to bail out. Official bank lending has more than doubled since the global financial crisis, growing nearly twice as fast as the overall economy. The even bigger problem, however, appears to come from the rise of a shadow banking system that has allowed a number of companies and individuals, often with political connections, to borrow from state-controlled banks at low interest rates and relend the money at much higher rates to private businesses desperate for credit. Now, in an effort to wean the banks and the economy off such risky practices, Beijing has pledged to deliver what amounts to the country's most sweeping financial overhaul in decades. Markets will play the decisive role in directing the economy, policymakers promised last month after a key plenum meeting of the Communist Party leadership. Interest rates are to be liberalised, cross-border investment will be welcomed and regional and bureaucratic protectionism will be curtailed, they declared. Already, even relatively modest moves are producing turbulence in money markets; last week China's central bank was forced to back off, at least temporarily, to avoid putting too much stress on the banking system and potentially drawing an angry reaction from powerful vested interests in China accustomed to paying very little for their loans. ... While policymakers say they are worried about upsetting the delicate mechanisms of the current banking system, public criticism continues to grow, even within China's elite. That suggests further market-oriented experiments could be coming soon. 'Banking in China has become like a highway toll system,' Yao Jingyuan, the former chief economist at the state statistics agency, was reported as saying recently. 'Banks charge every time money goes through them. With this kind of operational model, banks will continue making money even if all the bank presidents go home to sleep and you replaced them by putting a small dog in their seats.'"
• Bloomberg (2 January 2014) China's Runaway Train is Running Out of Track: "A financial drama is unfolding in China as the new year begins. Last week, for the second time in six months, interest rates in the critical interbank lending market spiked above 10 percent, prompting fears of a liquidity crisis that would trigger mass defaults and cripple the world’s second-largest economy. Western investors largely ignored the cash crunch and failed to grasp its potential significance. Although the situation has largely eased after the People’s Bank of China hastily injected at least $55 billion into the market, that isn’t the end of the story. ... [L]oose monetary policy is the problem, not the solution. Two simple words -- bad debt -- are the key to understanding why China has too much money, yet not enough. In the years since the global financial crisis, China has racked up impressive growth in gross domestic product by engineering an investment boom, fueled by a surge in easy credit. Total debt has risen sharply, from 125 percent of GDP in 2008 to 215 percent in 2012. Credit has spiraled to $24 trillion from $9 trillion at the end of 2008. That’s an additional $15 trillion - - the size of the entire U.S. commercial banking sector -- lent out in just five years. A lot of that money has gone into projects whose purpose was to inflate the country’s economic statistics, not to generate a return. Officially, China’s banks report a nonperforming loan ratio of less than 1 percent. In reality, they are rolling over huge amounts of bad debt, both on their own books and by repackaging it into retail investment products -- many of them extremely short-term -- that promise ever higher rates of return.China’s banks can hide bad debt by playing this shell game, yet that doesn’t change the fact that they’re not getting their money back. With their capital locked up in existing projects, the only way they can finance the next round of big investments -- and keep China’s GDP growth rates from collapsing -- is by expanding credit. More and more of that new credit is now eaten up paying imaginary returns on the growing pile of bad debt."
• Forbes (5 January 2014) Four Ways to Profit from a China Downturn in 2014: "For the record, we’re not predicting a China crash this year. We’ll leave sure-fire predictions (which are often wrong) to others. What we are suggesting though is the odds appear to favour a more serious economic downturn in China over the next few years." The article gives a concise overview of the opposing bullish case for China and its potential weaknesses.

China is seeing the same pattern that other countries saw before their recessions. Image Source: WSJ.

• WSJ (6 January 2014) China Tightens Grip on Shadow Banks: "China's cabinet has distributed rules to regulators aimed at limiting the growth in loans created outside formal channels for bank lending, according to a copy of the document reviewed by The Wall Street Journal. In the plan, which was sent in December and hasn't been made public, the State Council calls for stronger oversight of such informal lending by the central bank and other regulators. The plan, which amounts to an instruction to the country's top financial regulators, falls short of launching a full-blown crackdown on the sector, suggesting leadership wants to preserve what has become a key source of credit for the economy even though it has contributed to industrial overcapacity and high debt levels at local governments."
• Reuters (6 January 2014) China Makes Fresh Bid to Curb Shadow Banking, Contain Debt Risk: "China's cabinet has published guidelines strengthening regulation of risky off-balance-sheet lending in a new effort to address growing financial risks from an explosion in debt.The State Council's guidelines call for tighter regulation of banks' off-balance-sheet lending and say that trust companies - the biggest non-bank players in what's called 'shadow banking' - should return to their original purpose as asset managers and not engage in 'credit-type' business. A copy of the council's Document 107, dated December 11, was obtained by Reuters. There's been no official confirmation of the document, which was addressed to government agencies at the central and local level."
• NYT (7 January 2014) China's Shadow Banking Problem: "Economists have long worried about China’s so-called shadow banking system, in which banks and finance companies loan money to businesses and local governments at high interest rates outside the regulated financial system. Analysts worry that unregulated lenders, which themselves borrow money from regulated banks, have made too many dubious loans that could default and set off a broader financial crisis. In recent months, interest rates in China have surged from time to time in part because of the links between the unregulated and regulated parts of the financial system. The shadow system has grown in recent years because the Chinese government has too tightly controlled traditional banking. It keeps the interest rates that conventional banks pay to depositors extremely low and gives out cheap loans to state-owned enterprises and favored companies that might not be able to repay the money. The low rates, of course, have led savers to invest money in speculative real estate projects or dubious investments known as wealth management products offered by banks and finance companies that promise higher rates of return. Much of that money is then lent to private businesses and local governments, which cannot get conventional bank loans because regulated banks are required to give preferences to state-owned companies."
• Top Stock Analysts (8 January 2014) Why China's New Spending Spree is Great News for U.S. Investors: "To combat unsustainable, double-digit growth, the Chinese government has desperately tried to engineer some sort of slowdown over the past few years. And while it’s seen some partial success, China’s rampant expansion still requires new energy sources to keep the lights on and its factories humming. ... China currently imports 6.2 million of the 10 million barrels per day (bpd) that it consumes. And it’s coming from new energy sources. For example, places like Africa are becoming prime targets. Like Mozambique. Last year, China and India shelled out over $9.3 billion to the tiny, impoverished nation for a slice of its oil assets. To put that into perspective, Mozambique is a country with a projected 2013 GDP of $15 billion. So, you can see why it’s only too willing to accept China’s cash in exchange for resources. And when it comes to cash, China has realized that holding trillions of dollars is a loser’s game. It’s better to spend those dollars on hard assets today, rather than sit on a pile of cash with a long history of depreciation. And this isn’t an isolated strategy. It’s triggered a domino effect. Other countries – especially China’s fellow Asian nations, like India – have taken note of China’s action and are embarking on buying sprees of their own. And they’re eyeing assets in places that could spell profits for American investors."
• South China Morning Post (8 January 2014) I'm Good at Working with Jews, says Chinese Tycoon Chen Guangbiao Who Wants to Buy WSJ: "Chen Guangbiao, a Chinese recycling tycoon listed among China's top 400 richest people, has stunned many by traveling to New York this week in  pursuit of buying The New York Times. Yet after a failed attempt at meeting with shareholders of the Times, an unfazed Chen said he was now considering buying The Wall Street Journal. 'I am going to talk to the Wall Street Journal and find out if it's for sale,' he said in an interview with Sinovision, a New York-based Chinese television station on Wednesday, reaffirming his plan to 'buy an American newspaper.'Chen had said earlier that he was 'serious' about purchasing the Times, so he could work on 'rebuilding its credibility and influence' by reforming its award-winning coverage of China." 
• BBC (9 January 2014) China Seeks More Disclosure from Banks:  "Chinese banks - especially the big four state-owned lenders - played a key role in keeping the country's growth momentum going in the years following the global financial crisis. They lent record sums of money in an attempt to sustain China's high growth rate. However, there have been concerns that part of that money has gone towards unproductive investments and that banks may not be able to recover those loans. The fear among many is that a jump in non-performing loans would not only hurt the country's banking sector, but also have a big impact on its overall growth. While the percentage of bad loans at China's banks account for less 1% of total lending, some critics have claimed that banks were either rolling over such loans or even restructuring them to try and keep the reported figure low. That has led to calls for greater scrutiny of the sector."
• NYT (24 January 2014) Economic Shifts in US and China Batter Markets: "A decline this week picked up speed and spread around the globe on Friday, leading to the first sustained drop in United States stock indexes in 2014. The Standard & Poor’s 500-stock index fell 2.1 percent on Friday [24 January 2014], to end its worst week since June 2012. But the damage is expected to be worse in places that have relied on demand for raw resources in China, whose economic advance is slowing. An index of Chinese manufacturing growth released on Thursday showed that the most important cog in the country’s economy, the world’s second-largest, was contracting for the first time in six months."

The People's Bank of China, Beijing. Image Source: Bloomberg.