China

China’s great real-estate bust has begun, says Nomura. A combination of a huge oversupply of housing and a shortage of developer financing is producing a housing market downturn that could drive China’s GDP to less than 6% this year, The Wall Street Journal Real Time China blog reported. “To us, it is no longer a question of ‘if’ but rather ‘how severe’ the property market correction will be,” three Nomura analysts wrote in a report released Monday. And there isn’t much the government can do to head off problems.

Smaller Chinese banks have ramped up their shadow lending activity, adding to the financial risks that threaten to trip up the world’s second-biggest economy. The 2013 results of unlisted banks, published over the past week, reveal that city-based lenders have been among the most aggressive in China in using complex credit structures to evade regulatory controls and issue higher-yielding loans. These shadow loans have been profitable for banks so long as growth has been strong.

Loans between companies is the fastest-growing category of shadow banking in China, but with next to no data on where such loans are going, their effect on the economy is a black box, The Wall Street Journal China Real Time blog reported. But two academic papers published over the last year on such lending – known as entrusted loans – offer a rare glimpse into how these loans work. The findings? Entrusted loans may have become the single most important factor keeping China’s property developers afloat.

A network of loan guarantees set up to improve companies' access to credit in one of China's richest districts is creating new risks of default as some debts sour, another sign of how private firms are bearing the brunt of an economic slowdown, Reuters reported. Chinese media have reported on a credit crunch developing among steel and textile manufacturers in Hangzhou city, 175 km (110 miles) south of Shanghai in Zhejiang province, as the failure of some to repay loans pushes their burden onto healthier firms.

China’s bad-loan ratio rose “significantly” in the first quarter, increasing risks for the nation’s banking industry, according to the nation’s largest manager of soured debt, Bloomberg News reported. The business environment this year has been “grim and complicated” as lenders face pressures on asset quality, liquidity and lending margins, China Huarong Asset Management Co. Chairman Lai Xiaomin said during an internal meeting on April 15, according to a statement today on the website of the Beijing-based company.

Chinese Premier Li Keqiang’s plan to introduce deposit insurance is meant to comfort the nation’s savers as bad loans mount. In the bond market, it’s fueling speculation he’s preparing to let some banks collapse, Bloomberg News reported. Authorities may tolerate failures of smaller banks once depositor safeguards are in place, Kwong Li, chief executive officer of China Lianhe Credit Rating Co. said.

Facing a growing problem of debt defaults, the Chinese government should deploy 100 billion to 200 billion yuan ($16 billion to $32 billion) this year to help restructure indebted companies, a former adviser to the central bank said Thursday, The Wall Street Journal reported. "In the second half of the year, the government should promote debt restructuring in certain sectors," economist Li Daokui said at a news briefing, adding that the funds should be taken from the budget.

China's biggest airline by revenue warned it expects to report a first-quarter net loss, the first sign that the recent weakening of the nation's currency is impacting a major industry, The Wall Street Journal reported. China Southern Airlines Co. said late Tuesday it will likely post a net loss of between 300 million yuan ($48.2 million) and 350 million yuan for the quarter through March due to foreign exchange losses. In the same quarter last year, it posted a net profit of 57 million yuan.

In the past two months, China has suffered its first domestic bond default in recent history and a series of small bankruptcies that have some investors fretting the country could face its very own “Lehman moment”, the Financial Times reported. But behind the lurid headlines and fear of financial panic, something more complicated is happening. These systemically insignificant financial failures are being hyped up by China’s state-controlled media – and then unwittingly amplified by the international press – as part of a campaign of government-sanctioned “Potemkin defaults”.

China’s banking regulator ordered owners of the nation’s 68 trust companies to be prepared to provide funding or sell their stakes as the risk of defaults rises in the $1.9 trillion industry for high-yield investment. The China Banking Regulatory Commission told trust companies to either restrict their businesses and reduce net assets or have shareholders replenish capital when the firms suffer losses, according to an April 8 notice that was seen by Bloomberg News.