Economy

(Beijing)

Chinese steelmakers in the country’s industrial heartland are falling quickly as cash-strapped local governments no longer have the finances to prop them up. The heavily indebted companies are suffering from dreadful oversupply and tumbling revenues, making it hard to service their debts. Credit to the companies dried up in the face of the difficult environment, so the steelmakers began offering each other high-yielding loans, but these are now becoming a threat as the failure of many mills has meant that a chain of unpaid loans is beginning to flood through the system. The mills had been hanging on for as long as possible—not paying wages to workers—in the hopes that once other mills closed there would be enough business, but the situation will obviously have many losers, and that is now coming to bear. In Hebei province, just east of Beijing, 16 mills have already shut and workers are trying to break into the closed businesses to claim millions in months of back pay.


FINSUM: This is a frightening and important situation as it concerns the Chinese economy. The opacity of the system makes it impossible to be sure, but indubitably many of these failing mills comprise the shadow banking portfolios which are providing high yields to the country’s countless investment products. Stay tuned.

(Beijing)

New data compiled by Standard Chartered bank, and agreed by a large group of economists, now shows that China’s gross debt level has reached 250% of GDP, by far the most of any emerging economy. However, what economists find most alarming is its rate of growth. Total debt-to-GDP grew 17% in the first half of this year, and has ballooned from 147% of GDP in 2008 to 250% now. Similar rapid rises in debt have historically led to financial crises in other countries. According to a Chinese economist at Gavekal Dragonomics, “China’s current level of debt is already very high by emerging markets standards and the few economies with higher debt ratios are all high-income ones. In other words China has become indebted before it has become rich.” By comparison, the US’ debt-to-GDP level is just 260% and not increasing. The overconsumption of credit can be seen in the massive overcapacity of many assets in China, including housing, solar panels, and cement etc., yet the government is unwilling and unable to tighten credit for fear of bankruptcy of SOEs.


FINSUM: China is heading down a dangerous path as it continues to stoke credit consumption even in the face of a massive debt burden. The advantage the country has, and the likely reason it has not suffered a full scale crisis yet, is that the government still owns the majority of its financial sector and can simply order loans to be rolled over—something it could not do if more markets were more internationalised.

(Moscow)

Gracing major headlines yesterday was the news that the US and EU had jointly imposed a new round of sanctions against Russia. What was not widely offered was an interpretation of exactly how those would affect Russia, or an analysis of what its response might be. This Financial Times article does just that, showing how the sanctions against Rosneft and VTB will greatly affect their ability to raise funding on capital markets, infuriating Russia and likely forcing the companies to receive funding from the Russian state. Demand for Russian securities is dropping quickly, and because of the risk of future sanctions associated with them, investors are demanding a risk premium for Russian securities, raising borrowing costs significantly. Evidently, analysts close to the situation believe that Russia will strike back ferociously, probably nationalising all US energy and banking assets within their borders, “Citibank will just disappear here overnight,” said a senior official at a major Russian bank. Moscow may also withdraw capital from a large fund which is deposited in several US banks.


FINSUM: The US is clearly using its financial market muscle as a means to hurt Russia. The big issue now is how Russia will counter, and what that response will provoke from corporate America and corporate Europe, who seem opposed to further escalation with Moscow.

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