CHINA's Great Hall in Beijing, where the Communist Party plenum was held this week.

CHINA's Great Hall in Beijing, where the Communist Party plenum was held this week.

Edward Chancellor: China's Careering Credit Boom

Issue 64, November 2013

China is one big credit bubble, market historian and hedge fund adviser Edward Chancellor warns Global Mining Observer. Volatile interbank lending rates and a liquidity crunch in the city of Wenzhou this year “are sympotmatic that something under the surface is not going well,” he says.

The People’s Bank of China is using Wenzhou as a trial for tighter lending conditions to curb credit growth, driving up borrowing rates in the city and leading to the suicide of over 80 local businessmen. “Here the rich speculate on everything,” one resident told Le Monde in October. “Even on apricots. But if they have 10 empty apartments, we have nothing at all.”

According to JPMorgan, China’s credit to gross domestic product rose to 187 per cent in 2012, from 105 per cent in 2000. Chancellor says trophy buildings and apartment blocks without door handles or sockets, meant for trading rather than living in, are indicative of “tremendous over-building” and latent bad debts.

As symbols of credit excess, New York’s most outlandish skyscrapers including the Chrysler Building and the Empire State Building were commissioned in the late 1920s, but four towers are under construction in China that would eclipse America’s tallest building. China’s relentless building boom guzzles more than half the world’s steel production, with customs data showing imports of 458,000 copper tonnes and 75m tonnes of iron ore in September, equal to 30 to 40 per cent of all supply.

The government’s central planning committee held its annual plenum this week, pledging to allow markets to play a “decisive role” in allocating capital, up from a “basic role” in prior memos. The gathering avoided any mention of banks, interest rates or the renminbi.

China bears are “a bit lonely at the moment,” Chancellor says, with investor Howard Marks, chairman of the world’s largest distressed debt buyer, calling mainland equities “tremendous bargains” last week. “I’ve been to Asia and I see solid demand,” the sales exec of one copper major ventured recently.

Chancellor visits China every year, but cautions that travelling can be misleading. “If you’re visiting a Potemkin village and don’t see it as a Potemkin village, you will be overly impressed by the superficial impressions,” he says. “Closeness can be misleading.”

“Here the rich speculate on everything. Even on apricots.”

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