China's problems with non-performing loans (NPL)
The 06/06/06 edition of Stratfor's Geopolitical intelligence Report, a free email newsletter, is focused on China's issue with massive amounts of non-performing loans. Stratfor.com
is a consulting service that aims to provide businesses with the same kind of intelligence reports that government officials get from national intelligence services.
The 06/06/06 report includes estimates that the Chinese economy is carrying at least 670 billion dollars in non-performing loans (NPL). It is a testimate to the scale of the NPL problem that clearing the non-performing loans would nearly wipe out China's foreign reserves (estimated at about 800 billion dollars). The report states that Chinese banks are madly lending money to the companies with non-performing loans so those companies can keep up payments on their previous loans. This is not a long term solution.
Massive amounts of non-performing loans were at the core of the South Korean currency crises and recession in the 90's and the decades long recession (near depression) in Japan in the 90's and 00's. China's economy may be growing at 9% a year, but it may be cruising for a bruising if there is even the slightest downturn and the debts come due.
If China has a significant slowdown in economic activity, there are a number of possible ramifications:
China could stop buying American bonds, forcing the US treasure to raise interest rates to finance the US government deficit. Higher US interest rates could cause an economic slowdown in America.
China could have increased internal unrest. The Chinese Communist Party has maintained its legitimacy with the people because it has "delivered the goods" in terms of increasing standards of living. If living standards fall, the Communist Party will loose a lot of its legitimacy (it does not have the legitimacy that emerges from popular elections). With people unhappy about economic troubles, other tensions inside of China (urban vs. rural, young vs. old, regionalism, nationalism, language differences, etc.) could bubble to the surface, creating unrest.
If there is unrest, the Party may have to crack down to maintain power. Unrest and crackdowns are significant business risks, and could make foreign investors less likely to keep pouring money into China.
I'm not saying that China is going to implode. However, the non-performing loan problem is a significant risk for investors in China and that risk can result in problems that reverberate around the world.
Posted by georgegmacdonald at June 10, 2006 04:57 PM