Signs of China Deleveraging

Several reports indicate that China bubbles have started to deleverage.

From Macau Daily Times:

Deposits are flowing out of China’s major state-owned banks as high inflation and low interest rates prompt savers to seek better returns in the private lending market, Chinese state media said yesterday.

Outstanding deposits at the four biggest banks – Industrial & Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China – fell 420 billion yuan (USD 65.7 billion) in the first 15 days of this month, the China Securities Journal said, citing unnamed sources.

Much of the funds likely flowed into the private lending market, which offers borrowing rates around 10 times higher than the official deposit rates and has become increasingly popular as authorities tighten restrictions on bank lending, the report said.

Inflation has been hovering above six percent for months, nearly double the official benchmark one-year deposit rate of 3.5 percent, meaning savers have been losing money by parking their cash in the country’s banks.

The sharp fall in deposits has severely restricted the amount of money banks can lend, the report said, making it even more difficult for privately owned small and medium-sized companies to borrow.

Smaller businesses have already been hit hard by government efforts to rein in inflation, which include forcing banks to set aside more money in reserve and hiking interest rates five times since October last year.

The booming private financing market has fuelled concerns over the potential for an explosion in defaults, which could hurt the country’s financial system and social stability, a commentary in the Shanghai Securities News said.

“Once companies fail to pay pack their loans due to the heavy pressure of high interest rates, large portions of private funds will be totally lost,” said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, a government think tank.

http://www.macaudailytimes.com.mo/china/29799-Major-banks-losing-deposits-report.html

From Shanghai Daily:

The east China city of Wenzhou is battling its own subprime crisis after seven local business owners fled recently, leaving thousands of employees in a state of shock and enormous unpaid loans in hundreds of millions of yuan.

Most of the runaway bosses who have disappeared since September 12 are in the manufacturing industry, according to today's National Business Daily. Each of them had borrowed hundreds of millions of yuan from banks and private creditors.

Subprime lending in Wenzhou, the cradle of China's private economy, has been booming since the country tightened its money supply late last year to curb soaring inflation. State-owned banks are ordered to stick to a mandatory loan-to-deposit ratio and are reluctant to offer loans to small firms like those in Wenzhou over default risks.

The closed door to bank borrowing has forced some business owners to turn to private lenders, mostly illegal, despite the higher costs of their loans.

But when their business failed to perform as expected and it became obvious that the bankrupt business owners would not be able to pay their debts, some decided to flee.

http://www.shanghaidaily.com/article/?id=483329