Bharat Rakshak

MOSCOW, December 24 (Itar-Tass) - Russian banks will suffer moderately, if the US regulator toughens its monetary policy next year, says the Central Bank of Russia’s (CBR) Financial Stability Review. Amid uneven global economic growth some developed countries, primarily the US, may start to unwind quantitative easing (QE) earlier than the others.

“The first consequence of QE tapering by the U.S. Fed will be growth of long-term interest rates, since the regulator targets short-term rates separately. The yield curve’s upward turnaround for long-term rates may have a negative effect on debt market environment. Sovereign debt markets of the countries with overly high state debt may prove the most sensitive to an increase of long-term rates. Troubled Eurozone countries may suffer most,” the CBR believes.

Meanwhile, Russia’s position in terms of sovereign and private debt risks looks quite steady. Russia is among the countries with the lowest state debt relative to GDP. As of October 1, 2013, Russian state internal debt accounted for 7.7 percent of the GDP, which is several times less than that of the other BRICS countries. Internal corporate debt (non-financial organizations’ loans in Russian banks and issued bonds) made up 36.5 percent of the GDP, whereas the total external debt amounted to 35.2 percent of the GDP, where private sector (banks and other sectors) makes up 31.3 percent of GDP.

“The effect of rate increase on the Russian banking sector’s net profit in foreign assets and liabilities may be limited because of low gapping. Interest risk’s impact on the non-financial sector is also moderate,” the Central Bank believes.

To estimate potential risks for Russian banks ensuing from financial market volatility following QE wind-up, the CBR has evaluated their securities portfolio. As of September 1, 2013, investments in bonds in shares accounted for 11 percent and 1 percent respectively. Revaluation of securities portfolio may have a substantial effect on certain banks and the banking sector as a whole. Stress scenario suggests an increase in yields on Russian sovereign bonds by 200 points, for other bonds - by 350 points, while stock prices are expected to dip 25 percent. The analysis has found out most of the banking system is resistant against negative scenarios in the stock market in terms of capital adequacy: capital adequacy ratio Н1 after stress is estimated at 12.1 percent (real figure as of October 1 was 13.4 percent).

Besides, adverse effect of tougher FRS policy may show in swap market, where transactions are prone to currency and interest risks. Interest rate swaps in one currency (more than half of the market) and cross-currency interest rate swap (about a third) prevailed in Russian interest rate swap market in the second and third quarters of 2013, with the rouble and dollar being the key currencies occupying over 90 percent of transactions, mostly medium-term. According to the CBR, if interest rates grow by 200 basis points, while the rouble depreciates 30 percent, Russian banks’ losses on the interest rate swap will not exceed 10 billion roubles (about $303 million). However, in the future, given dynamic development of the interest rate swap market, risks may escalate for certain market players.

The CBR report points out “a considerable share of non-residents in the market - in more than 95 percent of transactions, one of counterparties was a foreign company or a subsidiary of a foreign bank holding registered in Russia. Most transactions on the market are intragroup.”

The mentioned estimates indicate Russian banks’ potential interest losses are moderate. The estimated decline of Н1 below 10 percent as a result of stress-test of certain banks’ interest risk, is rather connected not to the scale of negative revaluation of loan portfolios but low capital adequacy before the stress, the regulator believes.

Russian state internal debt accounted for 7.7 percent of the GDP, which is several times less than that of the other BRICS countries. Internal corporate debt (non-financial organizations’ loans in Russian banks and issued bonds) made up 36.5 percent of the GDP, whereas the total external debt amounted to 35.2 percent of the GDP, where private sector (banks and other sectors) makes up 31.3 percent of GDP.

The realization was as surprising as it was momentous. Toledo, long known as Glass City, needed glass, and it could no longer be manufactured here quickly enough.

So Toledo turned to China to make the 360 panels, 1,300 pounds each, needed for an extension to the Toledo Museum of Art. Some here resented the move after China supplanted the United States as the world's top glass producer. But in the process, city leaders began an improbable and remarkable relationship.
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Chinese companies made $12.2 billion in direct investments in the United States during the first nine months of 2013. That is up from $7.1 billion in all of 2012, which was itself a record at the time, according to the Rhodium Group, a New York-based consulting company. Chinese investors have been buying commercial and residential real estate in Detroit, inexpensively because of the city's financial troubles, and have agreed to finance a $1.5 billion waterfront development in Oakland, Calif. Earlier this year, on a trade trip to China, Gov. Jerry Brown of California discussed Chinese investment in the state's troubled $91 billion bullet train project.
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Gov. Jerry Brown of California discussed Chinese investment in the state's troubled $91 billion bullet train project.

Austin wrote:I wonder why these GDP table we see does not take debt of nation into account ....after all what good is a bloated GDP figure if debt based on borrowed money account of more than half of GDP.

Austin wrote:

Russian state internal debt accounted for 7.7 percent of the GDP, which is several times less than that of the other BRICS countries. Internal corporate debt (non-financial organizations’ loans in Russian banks and issued bonds) made up 36.5 percent of the GDP, whereas the total external debt amounted to 35.2 percent of the GDP, where private sector (banks and other sectors) makes up 31.3 percent of GDP.

Just trying to figure out what those respective debts are

Internal Debt = Government Borrowing from Public for its own Budget Needs via bonds etc @ 7.7 %
Internal Corporate Debt = Companies Private or Public that borrows from Russian Bank could be NPA 36.5 %
Total External Debt= Private Entity Borrowing from Cheap Loans from US or Europe 31.3 % , The rest of External Loan which stands at ~ 4 % is by non private entity.

So the most dangerous of these debts are the External Debt by Private Sector ? Or even the Internal Corporate Debt is as bad as external Debt ?

Christopher Sidor wrote:The most dangerous debt is External short term debt(sovereign and non-sovereign) followed by non-sovereign external debt and then finally Sovereign External Debt.

Christopher Sidor wrote:Since it is held domestically the debt can be restructured according to Japanese wishes like PRC or India often do with their banking NPA's. Or the JCB can further increase its monetary base. This will lead to inflation and wipe out many of the retirees.

China’s Boom Began With Successful Reforms
After suffering for three decades under Mao Zedong’s disastrous economic policies, China embarked on the path of gradual free market reform in 1978, led by Deng Xiaoping. Capitalist “baby steps” such as farm privatization, legalization of free enterprise and opening up to foreign investment helped China’s economy grow heartily in the 1980s, emboldening the country in its pursuit of further economic liberalization. The early 1990s saw the start of banking reforms and the early development of capital markets, including the opening of the Shanghai and Shenzhen Stock Exchanges. China’s growing desire to be communist in name only led to large-scale privatization of state-owned enterprises (SOEs) beginning in the late 1990s, with the number of SOEs decreasing an astounding 48% between 2001 and 2004 [1]. After reducing tariffs, trade barriers, regulations and radically scaling-back the Mao-era welfare system [2], China joined the World Trade Organization in 2001.

Having a vast army of highly industrious workers and low wages helped China to become the world’s preeminent manufacturing powerhouse, while pursuing an export-led growth strategy similar to its Asian neighbors. China rapidly urbanized as several hundred million people moved from impoverished farm villages to scores of newly-built cities in pursuit of factory and construction work and better living standards. The strategy of economic liberalization, modernization and infrastructure development has paid off handsomely with an unprecedented yearly GDP growth rate of 9.5% from 1978 to 2010, helping to lift hundreds of millions of Chinese out of poverty. Though China had already been growing at a high rate for over two decades, it was only in the mid-2000s that it entered the ranks of the world’s largest economies and started generating attention as a potential consumer market, investment destination and emerging superpower. China’s economy leapfrogged past the UK in 2005, Germany in 2009 and Japan in 2010 to become the world’s second largest economy, behind only the U.S.

How China’s Bubble Economy Began
After three decades of breakneck economic growth, China’s economy began overheating in 2007 and signs of speculation and over-exuberance started to appear, such as a brief stock bubble that year and a housing bubble in 2008. The 2008 global financial crisis caused China’s exports to plunge, forcing China’s leaders to abruptly refocus their worries from overheating to a potential domestic economic crisis and its very realistic threat to social stability. In November 2008, China launched a massive $586 billion economic stimulus program that was primarily invested in public infrastructure projects, housing, rural development and the rebuilding of areas hit by the 2008 Sichuan earthquake. China’s stimulus plan was successful at staving off a recession and social crisis – so successful that inflation, overheating and overbuilding quickly became a concern again as the newly printed stimulus money sloshed around the economy, creating very alarming distortions and speculative activity.

Economic stimulus, in the form of literally freshly-created money, is the quickest (and dirtiest!) way to create immediate economic growth. A stimulus program’s funds are typically used to create large scale construction projects that put unemployed people back to work, generate demand for raw materials and act as a conduit for new money to enter into and reinvigorate the overall economy. The problem with stimulus programs is that the creation of new money causes existing money to be devalued, leading to inflation and, in essence, stealthily taxing savers and wage earners to fund the stimulus program. The other problem with stimulus programs is that they very often led to the undertaking of extraordinarily wasteful projects that would never been attempted if natural market forces were in control. Capital that is wasted or destroyed in stimulus-fueled investment booms is called “malinvestment.” While stimulus programs do create some form of immediate economic growth, it is largely artificial and temporary as larger and larger injections of newly printed money are required for the growth to be sustained.

China’s Bubble Economy is Fueled By a Credit Bubble
China’s growth in the past decade has been overwhelmingly fueled by fixed asset investment (such as infrastructure development), which has further exploded since the launch of the 2008 stimulus program, accounting for more than 90% of economic growth in 2009. Over 100 extremely ambitious infrastructure mega-projects are currently being undertaken. Chinese cement consumption and construction spending has soared to truly bubble-like proportions as scores of extravagant and massive government buildings are being built in outer China, roads are dug up and rebuilt just to generate economic activity and cities binge on debt to build jaw-dropping infrastructure projects at all costs. China’s mad rush to build infrastructure projects has led to cut corners and shoddy workmanship, such as on the world’s longest sea bridge that was closed one week after opening due to safety problems, the much-publicized high-speed train’s disastrous crash and electrical problems and a new highway that collapsed after a test run.

A particularly strange and somewhat eery phenomenon has arose as a result of China’s building purely for the sake of creating economic growth – completely uninhabited “ghost cities,” such as Ordos in Inner Mongolia and many other empty full-size cities filled with apartment buildings and skyscrapers that can be seen in great detail via satellite imagery. Even the world’s largest mall, the New South China Mall, has been (link has an excellent video) 99% vacant since it opening in 2005 – malinvestment at its finest. There are now 70 billion sq. feet worth of buildings of all types under construction and enough new office space to give every person in China a 5′x5′ cubicle. Then there is another class of projects that can only be ascribed to “bubble drunk” decision making, such as the new government pharmaceutical plant that looks just like a palace, the wildly expensive stadium being built in the middle of nowhere and the railway bridge that was built by a chef. The latest bizarre Chinese construction fad is the replication of entire Western towns, such as Hallstatt, Austria, Greenwich, Connecticut and an English village. A Chinese billionaire’s plans to buy seventy-five thousand acres of Iceland to build an eco-resort is reminiscent of the late 1980s Japanese bubble, in which Japanese interests purchased Pebble Beach, Rockefeller Center and Columbia Pictures, while Nomura Securities proposed Japanese-American “joint ownership” of California. Most worrisome is the fact that five of the world’s ten largest buildings are now under construction in China, as skyscraper construction is a historically reliable indicator of economic bubbles, having marked the tops of the Roaring Twenties bubble in 1929 and the Asian Tigers bubble in 1997.

Economic bubbles and reckless credit booms go hand in hand and the China Bubble is no exception in this regard. A chart of Hong Kong banks’ exposure to Mainland Chinese debt displays the truly parabolic nature of China’s credit bubble that started in 2009. China’s local governments have financed their ridiculously extravagant construction projects via a $1.7 trillion “subprime” credit bubble, of which $540 billion is likely bad debt, according to Moody’s. Fitch has also warned about Chinese local government debt saying, “credit risk has risen from an over-extension of loans to local governments and property.” As the IMF sounded an alarm over the Chinese banking system’s vulnerability to heavy losses, an influential Chinese finance professor said that the Chinese banking system was “on the brink of bankruptcy” and that “every province in China is Greece.” To make matters worse, Société Générale has warned that China’s massive and largely unregulated shadow banking system may need to be rescued, no small feat considering how pervasive this type of banking is in China. In the city of Wenzhou, an incredible 90% of families are involved in the underground banking business, which includes loan sharking and pawnshops.

China Has a Massive Housing Bubble
China’s blazingly fast economic growth coupled with an expanding credit bubble and fresh sloshing stimulus money created the perfect conditions for inflation, which has manifested in the form of soaring rents, food prices and wages. High inflation, negative real interest rates and limited investment options encouraged many Chinese to buy real estate to protect their savings from the ravages of inflation, helping to reinflate the housing bubble that first reared its ugly head in 2008. Housing prices soared 140% higher nationwide from 2007 to 2011 with Beijing housing up 800% since 2003. Clearly having learned nothing from the disastrous US housing bubble, real estate speculators or “flippers” have taken China by storm, buying “real estate as if they were buying vegetables,” such as the housewife who bought 10 properties within 30 minutes and the college student who flipped an astounding 680 flats.

China Property Price Index:



China's Housing Bubble
Chart Source: GlobalPropertyGuide.com

While the IMF warns that China is “vulnerable to asset bubbles,” local governments encourage real estate speculation due to their reliance on land sales taxes to pay their mounting debts. Wild speculation has sent Chinese housing prices to unaffordably high levels, hitting a globally unprecedented 27:1 price to income ratio in Beijing. China’s overly-inflated housing prices have brought about strong social costs, as young men find themselves unable to get married without owning an apartment for example. A young architect even resorted to building and living in a small egg-shaped pod to escape the high cost of housing. High prices have sparked a building boom, with housing construction rising 41% in 2010 alone, helping to create an estimated supply of a 64 million empty apartments. Most alarming is the fact that China’s residential property investment as a share of its economy has reached the same level that the US housing bubble did at before its crash, while approaching levels hit during the epic Japanese housing bubble that resulted in a 20 year (and counting) bear market. Chinese investors’ rampant speculative fervor has even resulted in property bubbles outside of China, with Chinese real estate flippers driving Vancouver, Canada property prices far higher than locals can afford, while wealthy Chinese snap up luxury apartments in Manhattan.

Austin wrote:link

The National Audit Office, China's state auditor, said in a report local governments had total outstanding debt of 17.9 trillion yuan at the end of June, a sum that includes contingent liabilities and debt guarantees.

The debt load is in the middle of market forecasts and leaves China with total government debt of around 58% of gross domestic product.

Analysts said this suggested China is not on a verge of a fiscal crisis - the figure is less than half the debt burdens in Japan and Greece where public finances are strained - but warned the world's second-biggest economy needed to urgently reduce debt if it wanted to safeguard growth and financial stability.

This is especially because the long-awaited report showed some governments were using new loans to repay more than a fifth of their debt, and that authorities still relied heavily on selling land to pay off old loans.

MOSCOW, December 27. /ITAR-TASS/. The economic growth slowdown tendency has persisted in Russia in 2013. According to the updated forecast of the country’s Ministry of Economic Development, the GDP growth will make 1.4 percent at the end of the outgoing year of 2013, the Russian government press service said in the materials, which summarize the working results of the country’s Cabinet in the outgoing year.

The GDP growth has slowed down from 1.6 percent in the first quarter of 2013 to 1.2 percent in the third quarter of the year. The debt-to-GDP ratio has made 10.5 percent, the materials noted. The state reserves have amounted to about 700 billion dollars.

For three quarters of the outgoing year the budget revenues have exceeded 9.6 trillion rubles (about $293.8 billion), the budget expenditures have made about nine trillion rubles (about $275.4 billion), the budget surplus - about 650 billion rubles (about $19.8 billion).

According to the estimates of the World Bank, Russia entered the top ten countries “with highest progress in providing favorable conditions for business,” the government said. According to the World Bank Doing Business ranking, Russia went up 20 positions in terms of conditions for running a business.

Meanwhile, the investment in the fixed assets went down 1.2 percent in January-September 2013 against the same period of the previous year.

For the past 10 months the Russian industrial production has posted the annual zero growth (in January-October 2012 the growth has made 2.8 percent). The industrial output has increased by 5.3 percent for the past 10 months (against a 4.6% decline for the same period in 2012). The labor productivity growth has made 1.5 percent in 2013.

The production of the natural resources has posted a quite low, but stable growth of 1.2 percent for the past 10 months, the document noted.

Austin wrote:China figures was always in doubt but considering they are open about their internal debt means they are not too worried about it.

Suraj wrote:

Austin wrote:China figures was always in doubt but considering they are open about their internal debt means they are not too worried about it.

This is an assertion I do not agree with. They're open about what they choose to show, but are also very creative in their accounting to show a clean set of official books while NPAs and bad debts are off book. That doesn't necessarily imply they're worried, but that they want to provide enough just data to tell others not to.

When someone steps up and says 'whoops yes, we do have $3 trillion of local debt' and suddenly the debt/GDP estimate more than doubles from the chart, they are not demonstrating honesty. They're demonstrating how much they're willing to share. Honesty would be a constant series of data provided, that provides a consistent and reliable basis to track their debt/GDP (amongst other) figures in a fairly unambiguous manner over time. That has not been the case.

Under China's laws, local governments are barred from borrowing directly from banks or investors to protect the country's fiscal health.

Yet despite not being able to borrow, local authorities are responsible for most of China's public spending but take only half of fiscal income. Local governments in 2010 received 48 percent of total fiscal income but were responsible for 80 percent of public spending.

The funding shortfall has forced local authorities to set up firms over the years to borrow on their behalf, leading to a rapid rise in government debt outside official balance sheets.
"We expect the government to unveil detailed plans for fiscal reform," said Shen Jianguang, an economist with Mizuho Securities in Hong Kong.

TSJones wrote:.....expert says avoid gold, the last correction took 20 years...

http://finance.yahoo.com/blogs/breakout ... 48974.html