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May 5, 2010

A sign of a crash? ---Housing sales in China shows a drastic fall

Public debt in China is merely at the level of 22 percent of the GDP. There is no reason to worry about a sovereign risk of China.
But one has to take into account that their banks offer soft loans for construction of infrastructure and other unprofitable projects, which would be financed by official money in a capitalist society. Thus, the Chinese banks can be considered to be part of official lending mechanism. They especially cater the needs of local officials and party apparatchiks who need an "economic growth" for their own promotion.

Today's Nikkei reports that at the end of 2009 their balance of outstanding loans was about 40 trillion Chinese yuans, that is about 110 percent of their GDP. Nikkei reports as well that five major banks in China are poised to increase their capital base by more than 50 billion dollars (about 10 percent of GDP). They are worried to see that their capital-to-asset ratio has gone down to the level of 12 percent, and moreover may be sensing the risk that a large part of their loans will turn to be non-performing.

Meanwhile, as the Chinese authorities have introduced a stricter rule for housing loans in April, the real estate sales in major cities has drastically gone down as compared to April. This may be a temporal fall, but may well trigger a collapse of the real estate market, and that will trigger in its turn a chain reaction of non-performing debts.

A moment of truth may be approaching.


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