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US & Chinese banks - part 2, two sides of the one bubble
The impact of the global financial crisis on the Chinese economy cannot be underestimated. In part 2 of 'US and Chinese banks - the barometer for a global stock market recovery', David Whittall, Bennelong SGI Portfolio Manager, looks at the flow-on effect for China.
While US banks have spent a decade and a half financing domestic residential and commercial real estate, credit card and refinance-fuelled personal consumption, Chinese banks have been fuelling a massive expansion in manufacturing capacity and related infrastructure.
All the tools American contractors buy at Home Depot, all the furniture they've been stocking in their homes, all the televisions, video games and computers that adorn every room of every American house, were made in China.
US banks financed the purchase of these goods; Chinese banks financed their manufacture.Made in China
Within the world's second largest bank, the Construction Bank of China, corporate loans represented 70% of total loans, with the troika of manufacturing, transport and power making up the majority of the debtors.
Today, Chinese banks remain relatively pristine. Official data on non payment of loans (NPLs) are always a lagging indicator because they are triggered only after 90 days of non-payment. The December results will show a snapshot of September 2008, but the world has changed in that time.
Stop and think about the Chinese manufacturers who took out loans to build additional manufacturing capacity to support export demand of close to $US136 billion per month. Now that exports are running at $US65 billion per month, how will those manufacturers, swollen with expensive new excess capacity, pay their loans?
The collapse in building and construction in the US has bludgeoned trans-Pacific trade volumes: China's exports have halved in six months and in March, and 11% of the world fleet of container ships was idled.
The Chinese manufacturers, like the American homeowners, entered loan agreements on the basis of grossly inflated values and the bankers naively accepted the deal.
Given this outlook - and the fact that analysts have not yet adjusted their forecasts for the new reality - earnings disappointments over the next year will continue to puncture short-term rallies and send global stock markets further down.
That's not to say there are no opportunities in the global equities space, but spotting winners at the right moment will involve an unusual amount of tactical acumen.
This editorial is based on the white paper ‘US and Chinese Banks - the Barometer for a Global Stock Market Recovery', written by the Bennelong SGI global equities team.
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