Fears over a Chinese credit crunch have been gaining traction in recent weeks.  In a note this weekend Nomura analysts elaborated on a worrisome trend:

  • “In order to understand better how serious the problem is, we monitor the bill discount rate, which is the financing cost for firms when they sell commercial acceptance bills to banks for cash. A higher bill discount rate is a signal that the imbalance between supply and demand for credit has worsened. The 6-month bill discount rate has worsened at alarming pace since 2011, rising to above 10%.
  • The gap between the bill discount rate and the interbank rate has widened to 5.7 percentage points, the highest level since the data was made available. China’s credit market is becoming more fragmented. Financing costs for firms without access to bank loans have risen much more than those for large stateowned enterprises. The sharp rise in the bill discount rate may be partly driven by property developers who are facing worsening financing conditions given the lackluster sales.”
Data on Chinese credit trends is spotty at best.  As I often say, their economy is a black box and the data out of the government is close to impossible to believe/decipher.  Regardless, we continue to see red flags.  Not a good sign….

Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Neil Wilson

    “Regardless, we continue to see red flags”

    You tend to in China…


  • Cullen Roche

    The national slogan: “Welcome to China – don’t say you weren’t warned!”

  • Larry

    Maybe the best indicator on China would be the equity markets of the countries of whom China is their top market for their exports. That would be countries like Australia and Brazil. Since A & B’s equity markets are doing very poorly, is it not fair to conclude the same about China’s economy? Am I missing something? Is that too simplistic?

  • Cullen Roche

    I think that’s pretty reasonable….Clearly, their weakness is interlinked.

  • quark

    You mean access to government officials. China is not an example of free markets dictating economics, it’s an example of meeting the Politburo’s expectations.

  • KarmaPolice

    Never underestimate the Chinese government.

    They have more money than god.

    It’s like betting against the Fed.

  • John

    did the USA have a surplus pre 1929?Think I am correct in that

  • Stpepper

    Sure they do. But so had the Japanese government back in 1990 and where did that leave them? Also take into consideration what is the money spent on:,0,1682157.story

    Not in a badly needed new hospital or train station, but these ‘face projects’ whose only purpose is to make whoever is in charge feel good about himself. The whole thing is nuts.

  • Wulfram

    Should be interesting to see how their banks holdup. I know DTIs of 6-8 are not uncommon in Aussie realestate loa.s. With an unwinding of the weak dollar trade, things could get interesting in a hurry.

  • pebird

    I don’t know that commercial paper in China includes mortgage debt. I think this is paper for goods sold that is due for payment within 180 days. The increase in discount rate most likely reflects consumer and intermediate goods that are not selling as well as expected.

    Not to say that mortgage debt is not a problem.

  • hangemhi

    i’ve been reading about empty cities, attractions with no road to get there – and now stpepper’s article above including these lines:

    “These so-called face projects have proliferated since the 2008 global financial crisis. Spooked by a slowdown in China’s export sector, the central government stimulated the economy with easy credit and encouraged development of homes, commercial buildings and infrastructure to keep millions employed.”


    “The key behind this is that they always get kickbacks,” Zhou said. “There’s always corruption involved.”

    So here we are in the US freaked out that the gov wastes money, but sit in awe of the Chinese economy with most americans assuming they are overtaking us and giving us a good economic ass whooping. Yet all they are doing is what the hyperinflations here fret – massive, wasteful spending backed by huge money printing.

    Where does this all end? I don’t see how it can end well for them or the global economy.

  • John

    Wulfman, if you have watched or read any Canadian news, they are only to happy to tell their viewers that the Canadian banking system is the safest and best system in the world, I kid not, I have to listed to that for nearly 3 years.

    Lets see how this banking system holds up, with a massive drop in the Can$ in just 2 weeks, 150% debt to income on the consumers, highest in the OECD and the CMHC(Can’s version of Freddy & Fanny) is holding 500bil + of morgs, that possibly just possibly should never have been made.

    We’ll see soon enough if that Can$ keeps dropping

  • OntheMoney

    Yep, according to Jim Chanos the two greatest surpluses prior to China’s today were Japan in 1989 and the US in 1929.

  • Gary W

    John, the C$ drop is caused by US and EU problems – since Canada is a tiny country that runs on exports. Canada has escaped our structural problems but obviously it cannot escape our financial and industrial woes.

    Regarding China, the bill discount rate is a rare uncensored indicator of the coming real estate collapse. When it comes, Beijing’s absolute power will translate into instantaneous, appropriate and sufficient intervention.

  • John

    Gary – I think the commod sell off is more in line with Can$ sell off the large move happend in the last 2 weeks, the USA debt issue & Euro issues have been on going for longer and the Can$ hit it’s high, commods did not sell off has much has now.

    China already did the worlds largest infra struc spending bill, I guess they could do another but the assets have already been bought & paid for, if there is a liquidation it will be swift and we could see some Canadian RE and Oz RE spill over.

  • Ross

    Amazingly we saw the same sort of fawning adoration for the Japanese in the 80’s as we see for the Chinese today. Gonna’ show us how to do Capitalism right.

    The reaction of the Communist overlords in China to worsening economic data will be instantaneous, inappropriate and insufficient.

    Centrally planned economies don’t work – never have and never will. Having a boatload of money only postpones the inevitable and makes the crash more spectacular. They WILL hit the (great) wall eventually.

  • rhp

    Now, THAT got a guffaw out of me!

  • Rick

    Isn’t it amazing how all of the world’s largest economies repeat these same mistakes? Doesn’t anyone study history?

  • Andrew P

    If China is analogous to the USA in 1929, and the USA is analogous to the UK in 1929, then things could turn out very well for China indeed. If the same historical script is followed, there will be Great Depression II, the USA will be broke and its global empire will collapse, there will be a new fascist world conquest movement arising in Eurasia (complete with mustached dictator), WW III will be fought, and China will emerge as the world ruling empire after the war.

    Either that, or a true world government will emerge from WW III, in analogy to the League of Nations and the UN.

  • Andrew P

    The big question is: Can China’s government manage a very necessary correction as well as it has managed decades of rip roarin’ growth? Can they manage massive bankruptcies and a necessary liquidation of huge bad investments (like empty cities)? Or will they just stimulate and kick the can?

  • Different Chris

    Rick, didn’t anyone tell you? History is boring, current pop culture is much more exciting. (There isn’t one ‘yet’ but imagine this written in Sarcasm Font)

  • hangemhi

    a country that allowed the empty cities to be built, while random garbage dumbs abound, sludge rivers, raging smog….. are they really all that good at managing anything, let alone a soft landing? maybe they are japan 1980’s times 10 – as in 10 times worse when it blows up.

    aren’t the chinese just printing and spending on shiny new buildings? i’m honestly asking because i have no idea what they are doing. all i hear about is busted ponzi schemes, rampant fraud, embezzlement, former well-to-do developers fleeing, etc, etc. so WTF are we amazed with their economic prowess? we can print and spend and build crap no one visits too – will that make us the envy of the world (as if we’re not already no matter how bad we think it is here)?

  • Stpepper

    I’m not sure which history books you’ve read, but the whole depression to WW 2 timeline was a horrible thing for millions of human beings. Just because it didn’t affect the US mainland it doesn’t mean a lot of people didn’t suffer. I think the script I’m looking at is Japan 1990s rather than US 1929 ->1950s.

  • Stpepper

    My vote is in stimulate and kick the can. After all, they need to crank up employment numbers or they’ll face open revolt in so many places that you can risk a collapse of the country(Yes, I’m that pessimistic). The only impediment this time around are the violent side effects that will follow.

    I wonder if the Chinese population will have the stomach to digest way higher inflation, more corruption and injustice that will follow the stimulus.