China’s Slowdown – EconoMonitor

Yesterday I was on China Radio International (CRI) talking about the latest figures and trends for the Chinese economy:  the drop in real estate, record bank profits, weak trade and PMI data, and persistent inflation.  The overarching question was whether the perceived slowdown in China’s economy is real, and how worried we should be about it.  You can listen to the discussion by clicking here.

Regarding the record annual profits being reported by Chinese banks, I don’t have too much to add to what I wrote on that subject last year (in my blog post on “Chinese Banks’ Illusory Earnings”), except to say that it would be comic, if it weren’t so tragic.  As I said on the air yesterday, banks have two costs of doing business:  the cost of funds (which they pay to depositors) and the cost of bad debts that aren’t repaid.  Since Chinese banks enjoy a regulated spread between their deposit and lending rates, the more they lend (and they’ve been lending a LOT these past few years) the more money they make.  But the more generously they lend, the greater the risk they won’t be paid back — a risk that should be realistically tabulated and deducted from the earnings spread.

That isn’t happening.  The notion that Chinese banks have 1% non-performing loan (NPL) ratios is patently ridiculous, and the claim that provisions for 2.5 times that amount are somehow “generous” (or remotely adequate) are equally absurd.  I don’t believe it, and neither do investors in Chinese bank stocks, based on their valuations.  Any company can report “profits” if it doesn’t recognize half its costs of doing business.  Any company can boost “revenues” by granted easy credit terms to customers who can’t pay it back.

via EconoMonitor : EconoMonitor » China’s Slowdown.