Is This The Year China's Debt Bubble Bursts?
Ed Yardeni | Jan 27, 2014 01:27AM ET
The outsized reaction to China’s weaker M-PMI reflects mounting concerns that decelerating growth in the country could lead to a financial crisis, which could then slam the brakes on growth. China’s forward profit margin is among the lowest in the world. I have data on it starting in 2004. It was 4.0% at its most recent cyclical peak during September 2009. In mid-January of this year, it was down to 3.5%. Slowing growth with such a low margin could squeeze corporate borrowers' ability to service their debts, creating problems for their lenders. That’s especially true for those companies that are borrowing from the shadow banking system.
On Friday, January 17, Chinese state media reported that China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products (WMP) matures on January 31, the first day of the Year of the Horse. The Industrial and Commercial Bank of China, the world’s largest bank by assets, sold the investment to its customers, and warned that it will not compensate investors for their losses.
The trust company loaned the proceeds of almost half a billion dollars to a coal company, which must have been charged more than 10% since that was the annual return promised to investors. There has never been a default of a WMP. Until now, perhaps. On Friday, Bloomberg reported that the China Banking Regulatory Commission ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry and to closely monitor risks from WMPs, which are estimated to total $1.7 trillion.
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