The Coming Scary Bear?


   China Bear News Feed

December 2014

November 2014

Billionaire Bond Drop Shows Builder Finance Pinch: China Credit

October 2014

Burst Chinese Housing Bubble Leads To First Annual Price Decline Since 2012; Prices Drop In Record 69 Cities

China must accelerate reforms, not rely on fiscal and monetary policy to drive growth: World Bank

China's Sept property investment slows further; sales, construction slump

September 2014

Hong Kong Pops the China Bubble

China real-estate: A bubble bursting

August 2014

China's July economic data points to further softness

July 2014

Chinese Banks Seen Discounting Mortgage Rates, Survey Shows

China's Growth Continues To Be Driven By Massive Loads Of Debt

China Developers Offering Home Buybacks in Weakest Markets

June 2014

After port fraud, China's vast warehouse sector under scrutiny

Goldman Explains How Big China's Rehypothecation Problem Is (Hint: Very)

Banks Are Digging Into Metal-Backed Loans

May 2014

China to Cut Reserve Requirement Ratio for Some Banks

China developers rush overseas amid shaky home market

China plans crackdown on iron ore import loans

Yuan Falls to Lowest Since 2012 as China Data Signals Slowdown

Beijing rejects IMF's hard-landing warning for China's economy

China 'panicking' in face of sluggish growth: Chanos

March 2014

China Developer With $567 Million Debt Said to Collapse

February 2014

China - The Next Credit Crisis?

March 14th, 2014

In 2009, Chinese banks embarked on a massive Government implemented lending program which was designed to stave off a recession and put people to work.  The plan initially worked and China was seen as the silver lining in a world grappling with a massive banking and liquidity crisis as asset values collapsed over the globe.  Through the next 4 plus years, massive housing and commercial developments grew from an explosion in building fueled by bank credit.  By late 2011, the Chinese Government and Central Bank made attempts to reign in the booming Real Estate markets, requiring banks to hold more in reserves, and property buyers to put larger down payments.  Additionally, restrictions were placed on how many homes each person could purchase. 

During the same period of time, Chinese Capital Markets started to develop, allowing developers and other industries access to capital as banks become more restrictive.  These markets were unregulated and as products grew in use, so did claims of safety to buyers.  Many of these products were sold to investors at substantially higher returns than traditional investment options.  

The boom in China is shockingly similar to the process that took place in the United States between 2001 and 2006, only magnitudes larger.  After the Dotcom Bubble and 9/11, the Federal Reserve embarked on policies to stimulate the economy.  Housing took off, with money flowing into home construction as buyers piled into the market place looking for the next get rich quick scheme.  By early 2004 the Federal Reserve started to try and rein in the booming market by raising interest rates, much like China has tried to. 

During this same period, Wall Street Investment Banks were granted new and higher leverage ratios up to 40 to 1.  This allowed them to create new and far riskier mortgage products to continue the liquidity flow into the housing market. These funds did not respond to the Federal Reserve increase in interest rates as most end products were Stated Income or No Documentation loans which were less rate averse.

This allowed the US housing market one more push higher before the end came, an end that resulted in the total collapse of the residential mortgage shadow banking systems.  The collapse started to accelerate in July of 2007 when two Bear Sterns Hedge Funds focused on Subprime Mortgage Backed Securities (MBS) collapsed.  The MBS's were originally viewed as safe assets and rated AAA by the major Rating Agencies.  Once they collapsed, the whole MBS market was essentially re-priced down.

With the Hedge Fund collapse, it was the beginning of the end for the MBS market, Lehman Brothers and others.  The pace of the collapse accelerated as investors ran from any mortgage based products. The liquidity drained at a shocking pace and mortgage products disappeared from the market overnight.  Every time this occurred, it took potential new home buyers out of the market, which only added to the pace of the collapse.

Fast forward to today and China appears to be at the end of their credit expansion cycle and the beginning of a possible credit collapse.  If this plays out at all like it did in the US, the problems for the Chinese economy and society could be worse.   There have now been real defaults and real loses for investors, leading to rumors of one insolvent bank, causing runs on the bank.

Much like the failure of the Bear Sterns Hedge Funds which re-priced the whole shadow banking system, the first real default in China has very likely re-priced the entire shadow banking system in China.  This re-pricing process will very likely now lead to liquidity rapidly draining from the system as investors scramble to protect their funds. 

This will only add to the panic and there are signs this is happening as stories circulate that high end Hong Kong Real Estate agents are being told to cut prices on prized properties of mainland Chinese who are trying quickly to raise capital.  Some of these price reductions have been as high as 20% which will lead to more selling by other owners. This could even spread to other housing markets such as London, New York, LA and other cities, as wealthy Chinese try to raise capital. As the saying goes, he who panic sells first, sells best.

If we look at the scope of the potential problem based upon the amount of loans outstanding and the bonds/trusts coming due this year, it becomes clear this could develop into very serious problem.

List of known trust products coming due 

Accelerating default rates


This crisis is likely to spread across many industries and even countries.  One country that is particularly vulnerable is Australia since they are the raw material provider to China.  The stress in the commodities market and more specifically copper, shows how dramatic the problem is becoming.  The potential for a continued collapse in commodity prices could lead to a further unwinding as many commodities are used as collateral for loans. As these assets prices fall, the loans are called in, causing a further collapse in commodity prices.

Australia has several layers of exposure beyond just their commodity industry. If the collapse in commodity prices continues it will likely put pressure on the debt of these industries as profit margins collapse.  Additionally, the Australian housing boom and banking industry are highly leveraged to the commodity industry and could suffer as well.

The seriousness and size of the potential credit crisis in the second largest economy in the world could spiral out of control rather quickly, as it did in the beginning stages of the US credit crisis. It will depend on many factors such as what will be the Chinese Government's response?  Will they continue to allow defaults to happen and move forward with economic reforms?  Will they restrain from implementing further stimulus to curb the large amount of misallocation of resources and capital?   The answers to these questions will play a critical role in how China works through the deleveraging process.  If the process spins out of control the implications are global in nature, from Australia to Russia likely feeling the greatest impact as both of these countries are raw material and energy providers to China.

The Cyprus Effect

Cypress Bear News Feed

December 5th, 2013

RPT-Slovenia needs up to 5 bln eur to clean up troubled banks - sources

October 8th, 2013

Slovenia may seek help for its faltering banks

August 2nd, 2013

Australia unveils levy on bank deposit

July 26th, 2013

The Unintended Consequences of Cyprus


April 8th, 2013



The long term effects of the recent bank bailouts in Cyprus are likely to continue to play out over the coming months and possibly years.  The initial handling of the collapsing banking system in Cyprus can only be classified as horrific with the political drama unfolding from bad to worse to tragic for the entire world to witness. The initial plan to include a tax on insured deposits appeared to be poorly thought out and feed an already perilous situation which spun out of control in a matter of days.

Depositors have lost between 40% and 100% of uninsured deposits and with capital controls in place, it is easy to envision things will very likely deteriorate further for the small island nation.  Cyprus has been the most recent in a long parade of countries burdened by too much debt requiring a bailout.  What distinguishes Cyprus from other bailout recipients is that fact that depositors for the first time actually lost money.

This precedent will make future banking crises even more difficult to manage as depositors will rapidly drain their capital at the first hint of trouble.  The edginess of depositors could even lead relatively healthy banks to become crippled as precious deposits flee at the time they are most needed.  Another aspect of these fleeing funds is that they are likely to move into not only stronger banks but stronger banks in the core of Europe. While these additional deposits benefit these core country banks, they could also add risk to the very same banks.

This additional risk would be driven by the counterparty exposure of the core country banks to collapsing periphery banks. Knowing what each bank exposure is as it relates to another bank is extremely challenging in modern banking.  The opaque nature of OTC derivatives clouds the ability to know what a bank's true exposure is.  It is exactly this challenge that can cause a banking crisis to quickly spin out of control.

Now that we are seeing a different form of attack on depositors, we seem to be transitioning from a system of bank bailouts to "bail-ins."  Reccent comments by Olli Rehn and Dutch Finance Minister Jeroen Dijsselbloem  evidence this shift. Additionally, this weekend at a gathering of EU finance ministers in Dublin, Ireland there will be consideration to impose losses on interbank deposits of lenders. This will likely add to the fragility of the banking system after the ECB worked so hard to unfreeze the interbank lending market post crisis. The real question is who is next and what are the futher implications of "bail-ins"? 

There appear to be many unfortunate candidates waiting in this line. This list includes the usual suspects like Spain or Italy, however we believe that Slovenia is the next country that will be very likely requesting a bailout.  Evidence of this potential direction can be seen by the recent stress in the Slovenia bond markets. 


What is driving this spike in yields?  We suspect it is the rapid deterioration of loan performance in the Slovenian banks as home prices collapse.  At some point fairly soon, these loses will hit a critical mass and the banks will require recapitalization.  The primary issue with the banks going to the government for a bailout is that the Slovenian banking sector is 1.4 times greater than the country's GDP.

Slovenia is like most other countries in the European Union, where their banking sector is larger than the host country's GDP, by many multiples in most cases.  The Slovenia situation is not unlike Ireland's before its bailout.  Ireland had a very low 25% debt to GDP ratio before they had to bail out their banking sector.  Now they are burdened with a 117% debt to GDP ratio.  Slovenia's current debt to GDP ratio stands at almost 50% but more concerning is how quickly it has increased over the past few years.  In 2010 it was 5.6% and in 2011 it was 38% and by the end of 2012 it was 43%. Unfortunately, all of the numbers appear to be going in the wrong direction and at an alarming rate.  

Would this be another "unique" situation with the new "bail-in" doctrine enforced in Slovenia as well?  We suspect it would, as Germans continue to revolt against using more German tax payer funds to bail out other countries. This is especially true during an election year where Angela Merkel's party faces anti-bailout pressure. 

When the next country does need a bailout, or should we say "bail in", the "unique" situation cliché will no longer be considered "unique".  This will very likely cause further shockwaves throughout the European Union as depositors scramble for safety.  Italy would most likely be hardest hit by another bail-in as they continue to struggle with a decade long recession and inabilities to form a new government, all while propping up their third largest bank as depositors flee over scandals. 

Unfortunately for Italy, they have very little room to maneuver with credit drying up and business output collapsing. The outlook is dire, even without another "bail-in" setting precedence.  Italy is projected to hit a 130% debt to GDP this year, all the while unemployment hit 11.7% in January with youth unemployment at 38.7%.  Once again we are seeing the numbers all going in the wrong direction but with far larger implications, since Italy is the 3rd largest debtor in the world and 7th largest economy. 

If Slovenia does require a bailout and the new "bail-in" doctrine is utilized, Italy will most certainly be negatively affected as depositors flee for safety.  It is these fleeing deposits that can quickly materialize as a collapsing banking sector and if that occurs in Italy, the challenges for the EU become very dire indeed.