Wednesday, January 6, 2010

The smell of lending bubbles in China. Do you like butter on your popcorn?

One item which is becoming a pet peeve of mine is the practice of writing articles making predictions with no underlying factual data to buttress their conclusions.  If you are going to predict something, at least tell me why! 

A current hot topic is China and whether it is in a bubble.  And if in a bubble, what kind?  Well, here's some juicy data and anecdotal evidence for you to chew on.

If you notice, lending in China skyrocketed last year.  As of November 30, 2009, total loans outstanding are up nearly 35% year over year.  That is a huge increase in the rate of growth.  

I would put to you that all that money sloshing around did not just end up in solidly performing loans made with proper underwriting standards with the full expectation they will be paid back. 

Sharp eyed readers may notice the decline in lending growth from October 07 to the nadir of November 08 coincides with the dramatic decline in the Chinese equity markets almost perfectly.  Once the lending spigots were turned back on the Chinese markets reversed course and charged back up again. 

I have previously mentioned my suspicions that some of that lending deluge has also made its way into the commodity markets as pure speculation, but I'll leave that to a later entry.

The hedge fund manager Jim Chanos has also noticed this excess credit creation.  Around time point 4:15 he starts to discuss China and their excessive lending.

When will this bubble pop? Can't tell you that. Keeping the pace of lending up at 35+% yoy may be a challenge for the Chinese government this year as the banks are running out of spare capital. There's already a lot of talk and some action trying to tamp down the speculative fires in property prices.  Where and when this all goes poof  is subject to speculation.  If it ends in 2010 it will punch a serious hole in the current world-recovery-buy-commodities-and-all-risky-assets theme. Its a dangerous game to play right now as prices can go parabolic before they go splat but I'm watching and waiting. 

Sit back and get your popcorn. The show will be very interesting to watch in 2010.

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