The Dump

Recycling has become popular in China.

In 1999, Chinese state owned banks dumped $200B (U.S.) of bad loans made during the 1990s into Asset Mgmt Companies (AMC) or “bad banks”, banks set up to hold “toxic assets” and non-performing loans. Six years later, they dumped another $170B into these AMCs. Many of these loans are carried on the books at face value, far above their true market value. When the loans came due this year, most were rolled over for another ten years. Here is a brief summary from the Gerson Lehman Group.

Large private companies have been accused of managing, or massaging, earnings in order to sustain a higher stock price for the company’s stock. Tempting as this practice is for private executives, public officials are under even greater pressure to put their best foot forward by manipulating asset values. China’s strong, rapid move to urbanize is bound to incur casualties along the way. The commercial real estate market is beset with vacancies, while newly constructed factories stand ready to supply a world whose demands have slowed. When state owned banks defer the recognition of bad real estate loans, it becomes difficult to honestly evaluate their financial status.

FXI is an ETF that tracks China’s top banks. A word of caution.

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