China debt crisis just happened
2017-08-30 08:15阅读：
Credit default swaps are storing up trouble for China,
FT, 29 August 2017, by Joe Zhang,
Credit default swaps are a Wall Street
invention. During the crisis of 2008, they crippled a number of
significant financial companies. But where in the world are such
instruments most popular? Not in the US, despite what you might
think, but in China.
The China Financing Guarantee Association, a
quasi-governmental body that regulates the guarantee companies (in
other words, the issuers of the swaps), says it has 194 member
institutions, though their ranks have thinned in recent years. Many
guarantee companies have simply not bothered to become members of
this club.
In a parallel with the American obsession
with home ownership that led to the formation of Fannie Mae and
Freddie Mac, the federal housing finance agencies, the Chinese
government has in the past few decades done its best to promote
small
and medium-sized enterprises by providing them with credit
guarantees. Tens of thousands of state-owned, private and hybrid
guarantee companies have come into being.
And just like Fannie Mae and Freddie Mac,
China’s guarantee companies are all thinly capitalised. This is due
partly to the misconception that a third-party guarantee is
sufficient for SMEs to tap commercial credit. Mispricing in China’s
CDS market is severe and chronic. The guarantee companies typically
charge only 2-3 per cent to the borrowers, but assume the full risk
of their loan delinquency.
When the economy was growing fast, from the 1980s
through to the early 2010s, these guarantee fees seemed like manna
from heaven — so much free money. But when the economy began to
slow from 2012 onwards, default rates rose, and many guarantee
companies disappeared. Only then did people begin to question the
business model and the pricing of guarantees. However, nobody seems
to know how to correct the problem of mispricing.
Unlike CDS in the US, credit guarantees in
China have the following deficiency: usually, they cannot be
traded. Some observers argue this is probably an advantage for the
industry because it forces deal originators to “eat what they
cook”, minimising irresponsibility and recklessness in their
origination process. It is estimated that the total size of China’s
market for such instruments is more than $500bn, excluding the
credit enhancement these guarantee companies provide to SMEs’ bond
sales and asset-backed securities. But no one knows the size of the
market for sure.
The number of guarantee companies still
operating has reduced significantly since the peak in 2011. Today,
their main mission is to unwind their long-duration guarantees and
liquidate the collaterals they have repossessed — dubious equity
stakes here and there, land or real estate. There are some healthy
operators, but they are few and far between.
Why should this story be of interest to the Chinese
public and, indeed, to outside observers? Because it is key to
understanding the strange longevity of China’s credit bubble. It is
true that the country’s credit market is far too big, but against
the doomsday scenarios some analysts have painted, it has refused
to burst because of the many non-bank financial institutions that
have served as plumbers for the banks.
China’s economic slowdown in the past five years has
decimated its microcredit sector and, to a lesser extent, the trust
companies. Their destruction has also helped shield the commercial
banks.
As one grateful commercial banker recently remarked
to me, CDS, bridge loans and wealth management products have served
as the banks’ sewage pipes. Half-jokingly, he described the CDS
issuers as “selfless and heroic”.
The writer is the
chairman of China Smartpay Group and a former manager at the
People’s Bank of China
