China is using the strategy of giving credit and loans to countries across the world to become a global power with great influence, a top US intelligence official has said.

Daniel R Coats, Director of National Intelligence, told members of the Senate Armed Services Committee during a Congressional hearing said China was using a number of techniques that are far more than just the typical military land grab to increase its influence.

&quot;While China is modernising its military, is increasing its spending, most of it appears to be done for a deterrence purpose, rather than an aggressive purpose. They clearly have a strategy of using credit and loans to countries around the world, particularly in geo-strategic places, then combining it with some military capacity &mdash; South China Seas &mdash; their new base in Djibouti,&quot; Coats said.

&quot;We see that China is seeking, I think, to become a world power with great influence on a global basis. And they&#39;re using a number of techniques that are far more than just the typical military land grab that we see more likely with Russia, rather than China,&quot; Coats said.

He was responding to a question from Senator Angus King on the intelligence community&#39;s assessment of what China wants.

&quot;Are they moving toward military aggression and enlargement of their territory? Or are they looking more toward political and economic influence in the region?&quot; he asked.

&quot;It appears to be the latter,&quot; Coats said.&nbsp;

US official was responding to a question from Senator Angus King on the intelligence community's assessment of what China wants.

China is using the strategy of giving credit and loans to countries across the world to become a global power with great influence, a top US intelligence official has said. Daniel R Coats, Director of National Intelligence, told members of the Senate Armed Services Committee during a Congressional hearing said China was using a number of techniques that are far more than just the typical military land grab to increase its influence. "While China is modernising its military, is increasing its spending, most of it appears to be done for a deterrence purpose, rather than an aggressive purpose. They clearly have a strategy of using credit and loans to countries around the world, particularly in geo-strategic places, then combining it with some military capacity — South China Seas — their new base in Djibouti," Coats said. "We see that China is seeking, I think, to become a world power with great influence on a global basis. And they're using a number of techniques that are far more than just the typical military land grab that we see more likely with Russia, rather than China," Coats said. He was responding to a question from Senator Angus King on the intelligence community's assessment of what China wants. "Are they moving toward military aggression and enlargement of their territory? Or are they looking more toward political and economic influence in the region?" he asked. "It appears to be the latter," Coats said.

China giving loans to countries across world to increase its influence: US official

The latest banking scam, this time in the Punjab National Bank to the tune of INR 11,000 crores, is yet another reminder of just how well the Indian economy is being managed in the interests of the super-wealthy. Over the years, and particularly during the boom years of the 2000s, when employment growth was negligible and &ldquo;jobless growth&rdquo; became a commonly used phrase, India&rsquo;s corporate elite, including some of its best-known business houses, went on a borrowing spree. They borrowed from private and public sector banks, they borrowed domestically and abroad. It is now clear that many of these loans were never intended to be repaid. The public sector banks, in particular, issued thousands of crores worth of loans without due diligence or even with active collaboration in the fraud.&nbsp;

Starting in the early years of this decade, the Reserve Bank of India itself was under pressure to do something about the building problem and started forcing public sector banks to reveal how many such loans were on their books. This is when the true extent of the problem, long-festering, started becoming apparent.&nbsp;

As per the recent estimates, there are around INR 10 lakh crores worth of bad loans in the Indian banking system. This number will likely rise. To gain a sense of proportion this is around 7% of India&rsquo;s GDP. The entire union budget for this year was INR 24.42 lakh crores and the fiscal deficit was around 6.2 lakh crores. This year&rsquo;s MGNREGA budget is INR 55,000 crores.

The amount of money borrowed by India&rsquo;s wealthy citizens in connivance with its officials with no intention of ever repaying it is larger than the amount that the union government spends on health, education, food and fuel subsidies, agriculture, rural and urban development, combined.&nbsp;

But this is not the end of the bad news for the country&rsquo;s ordinary citizens who still struggle for small amounts of credit to run their businesses and households. First, it is not known how much of this massive borrowing became a useful investment in the economy and how much was converted into unproductive foreign and domestic assets, as well as luxury consumption.

If the Nirav Modi case is any indication, then we may expect more the latter than the former. Second, not only have we paid once in the form of the opportunity cost of these loans, i.e. the alternative uses to which we could have put this credit, we are paying for it a second time in the form of the budget outlays on what is called bank recapitalisation. This is where the government uses its tax revenue to replace bad assets (loans that will never be repaid) with good ones. This allocation for the current budget was INR 2.11 lakh crores, larger than the allocation for many crucial development programs.

National outrage has understandably followed the latest revelations. But sadly, as expected, this has given the proponents of bank privatisation another excuse to push their agenda. Since the vast majority of bad loans in the banking system are on the books of the public sector banks, the solution seems simple. Privatise them. Make them subject to market discipline and such corruption and negligence will not occur. But this argument appealing to the power of the market to discipline finance can only be convincing to those who have been asleep through the 2008 financial crisis. The cronyism, corruption, conflicts of interest, and open fraud that were the hallmark of this crisis are very well-documented. That very few high profile convictions resulted is a testament to the power of the finance lobby in the United States and elsewhere than to the lack of evidence.&nbsp;

What makes us think that the equally, if not more, compromised Indian institutional climate will respond any better under a largely private banking sector than a public one? Privatisation of banks does not alter the fact that 1% of the richest Indians control nearly 60% of its wealth. Further, a private banking system is not the same as a competitive one. The US has the former, but no one would mistake it for the latter.

The PSU banks have to be reformed is clear. But &ldquo;reform&rdquo; is not a synonym for &ldquo;privatise.&rdquo; What we urgently need is public, accountable, and functional finance.

The country&rsquo;s permanently credit-starved micro, small and medium sector, including agriculture, can truly transform this economy if supported well. Their individual credit requirements are not high, but they are large in numbers. Such a situation is ideal for a distributed public banking system. The current high-handedness and lack of accountability in public banking is not an excuse to privatise it. It is an excuse to make it accountable locally. Something we have never attempted seriously. Banking performs the crucial function of linking savers with borrowers, those with capital to those who can use it. Further, having the power to create money by making loans, banks are endowed with one of the most powerful tools of development. There is no argument for making this incredible power beholden to elite interests. There is every argument for making it as decentralised and distributed as possible.

But what about the bad loans? Here too the choice is clear; whether to pursue those who stole the money and to retrieve it, or to pay for our theft ourselves. The answer should be obvious.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)

There are around INR 10 lakh crores worth of bad loans in the Indian banking system. This number will likely rise.

The latest banking scam, this time in the Punjab National Bank to the tune of INR 11,000 crores, is yet another reminder of just how well the Indian economy is being managed in the interests of the super-wealthy. Over the years, and particularly during the boom years of the 2000s, when employment growth was negligible and “jobless growth” became a commonly used phrase, India’s corporate elite, including some of its best-known business houses, went on a borrowing spree. They borrowed from private and public sector banks, they borrowed domestically and abroad. It is now clear that many of these loans were never intended to be repaid. The public sector banks, in particular, issued thousands of crores worth of loans without due diligence or even with active collaboration in the fraud. Starting in the early years of this decade, the Reserve Bank of India itself was under pressure to do something about the building problem and started forcing public sector banks to reveal how many such loans were on their books. This is when the true extent of the problem, long-festering, started becoming apparent. As per the recent estimates, there are around INR 10 lakh crores worth of bad loans in the Indian banking system. This number will likely rise. To gain a sense of proportion this is around 7% of India’s GDP. The entire union budget for this year was INR 24.42 lakh crores and the fiscal deficit was around 6.2 lakh crores. This year’s MGNREGA budget is INR 55,000 crores. The amount of money borrowed by India’s wealthy citizens in connivance with its officials with no intention of ever repaying it is larger than the amount that the union government spends on health, education, food and fuel subsidies, agriculture, rural and urban development, combined. But this is not the end of the bad news for the country’s ordinary citizens who still struggle for small amounts of credit to run their businesses and households. First, it is not known how much of this massive borrowing became a useful investment in the economy and how much was converted into unproductive foreign and domestic assets, as well as luxury consumption. If the Nirav Modi case is any indication, then we may expect more the latter than the former. Second, not only have we paid once in the form of the opportunity cost of these loans, i.e. the alternative uses to which we could have put this credit, we are paying for it a second time in the form of the budget outlays on what is called bank recapitalisation. This is where the government uses its tax revenue to replace bad assets (loans that will never be repaid) with good ones. This allocation for the current budget was INR 2.11 lakh crores, larger than the allocation for many crucial development programs. National outrage has understandably followed the latest revelations. But sadly, as expected, this has given the proponents of bank privatisation another excuse to push their agenda. Since the vast majority of bad loans in the banking system are on the books of the public sector banks, the solution seems simple. Privatise them. Make them subject to market discipline and such corruption and negligence will not occur. But this argument appealing to the power of the market to discipline finance can only be convincing to those who have been asleep through the 2008 financial crisis. The cronyism, corruption, conflicts of interest, and open fraud that were the hallmark of this crisis are very well-documented. That very few high profile convictions resulted is a testament to the power of the finance lobby in the United States and elsewhere than to the lack of evidence. What makes us think that the equally, if not more, compromised Indian institutional climate will respond any better under a largely private banking sector than a public one? Privatisation of banks does not alter the fact that 1% of the richest Indians control nearly 60% of its wealth. Further, a private banking system is not the same as a competitive one. The US has the former, but no one would mistake it for the latter. The PSU banks have to be reformed is clear. But “reform” is not a synonym for “privatise.” What we urgently need is public, accountable, and functional finance. The country’s permanently credit-starved micro, small and medium sector, including agriculture, can truly transform this economy if supported well. Their individual credit requirements are not high, but they are large in numbers. Such a situation is ideal for a distributed public banking system. The current high-handedness and lack of accountability in public banking is not an excuse to privatise it. It is an excuse to make it accountable locally. Something we have never attempted seriously. Banking performs the crucial function of linking savers with borrowers, those with capital to those who can use it. Further, having the power to create money by making loans, banks are endowed with one of the most powerful tools of development. There is no argument for making this incredible power beholden to elite interests. There is every argument for making it as decentralised and distributed as possible. But what about the bad loans? Here too the choice is clear; whether to pursue those who stole the money and to retrieve it, or to pay for our theft ourselves. The answer should be obvious. (Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)

Opinion: After Nirav Modi frauds PNB, are we to pay for our theft ourselves?

With efforts to recover its dues hitting a virtual dead-end, the State Bank of India (SBI) seems to be have started a clean-up of its balance sheets by writing off loans worth about Rs 7,016 crore owed to it by more than 60 of its top 100 wilful defaulters.

While 63 accounts in the list have been fully written off, 31 have been partially written off and six have been shown as non-performing assets (NPAs), reveal documents accessed by DNA. As on June 30, 2016, SBI has written off Rs 48,000 crore worth of bad loans. The documents, however, don&#39;t specify the entry time of these &quot;write-offs&#39;&#39;.

India&#39;s largest public sector bank has dropped the money, mostly wilfully defaulted, into a specially created dustbin for &quot;toxic loans&quot;&nbsp;called Advance Under Collection Account (AUCA), technically known as a write-off.

Information on the bank&#39;s clean-up comes a week after the government said it was targeting black money hoarders by demonetizing high-value currency notes, a move that has seen millions queue up outside banks across the country to exchange their money.

Now, loans given to Vijay Mallya&#39;s Kingfisher Airlines, which heads the wilful defaulters&#39; list with outstanding dues of almost Rs 1,201 crore, and 62 others will not be shown in the bank&#39;s balance sheet.

Following the defunct airlines in the top 20 write-off list are KS Oil (Rs 596 crore), Surya Pharmaceuticals (Rs 526 crore), GET Power (Rs 400 crore) and SAI Info System (Rs 376 crore). Most of these write-off accounts are those of wilful defaulters.

SBI has put all such accounts into AUCA, says its internal report seen by this correspondent. &quot;The main advantage which the bank will have by transfer to AUCA is that banks gross NPAs amount and net additions in NPAs during the quarter will be reduced to the extent of the amount of transfer to AUCA. It will bring down gross advance by the same amount,&quot; the reports states.

SBI did not send any reply to several emails and reminders sent by this reporter. Questions sent to top five &quot;write-off&quot; companies also didn&#39;t get any reply.

&nbsp;

The top five

Kingfisher Airlines owes a total of Rs 6,963 crore to 17 banks, of which SBI&#39;s loan is Rs 1,201 crore. Recently, an e-auction of Mallya&#39;s Kingfisher Villa in Goa failed to find any buyer. Sources said that SBICAP Trustee did not get earnest money deposit (EMD) from even a single bidder.

KS Oil, once a leading edible oil player under the brand names Kalash and Double Sher in the mustard oil segment, turned defaulter and got added to the top 20 list of write-off accounts. KS Oil has allegedly indulged in the diversion of funds from its core business. The company invested huge amounts on plantations in Indonesia and Malaysia but failed to get the expected returns. Though the loan account has been restructured, the company has been unable to revive itself. Lenders have also withdrawn the company from CDR (corporate debt restructure). KS Oil was declared NPA in 2013 with effect from September 30, 2011. As with Kingfisher, the recovery effort was futile as e-auction of five units failed due to lack of bidders.

The third in the list of write-off accounts, Surya Pharmaceutical, was named a wilful defaulter in 2013. The company allegedly indulged in fraud, diversion of funds in retail and education sectors. SBI has symbolic possession of eight properties and is struggling for another in Jammu and Kashmir. A forensic audit from E&amp;Y tagged this a fraud account.

Ajay Kumar Vishnoi&#39;s promoted GET Power Ltd was declared wilful defaulter on August 23, 2016. The company&#39;s mismanagement and the delay in projects led to trouble for the promoters.

The fifth in the list, Sai Info, has dues of Rs 375 crore and was declared wilful defaulter on August 26, 2016. In June 2013, the company&#39;s main promoter Sunil Kakkad absconded but was brought back to India and arrested.

Kakkad is now out on bail. The company has cancelled two high value projects &ndash; from the Department of Posts and a Mumbai CCTV surveillance project &ndash; worth Rs 2,200 crore. This account has also been declared a fraud. SBI could not get any recovery and could only get symbolic possession of some of the properties.

&nbsp;

What are the write-offs?

Banks exercising write-offs is a unique idea to clear bad loan impacts on balance sheets. Banks use the RBI approved tool, Advance Under Collection Accounts (AUCA), in which transfer of accounts to a specific AUCA is an NPA reduction strategy. It is resorted to after exhausting all avenues of recovery, restructuring and compromises. By writing-off bad and doubtful assets, banks can improve NPA ratios through cleansing of the balance sheet and tax benefits. All write-offs, except where one-time settlement or compromises are involved, irrespective of outstanding, should be treated as technical write-offs and parked in AUCA; recovery process of these accounts will continue till resolution of these accounts.

(This report first appeared in DNA)

&nbsp;

Loans given to Kingfisher baron Vijay Mallya, who heads the wilful defaulters' list?and 62 others will not be shown in SBI's balance sheet

With efforts to recover its dues hitting a virtual dead-end, the State Bank of India (SBI) seems to be have started a clean-up of its balance sheets by writing off loans worth about Rs 7,016 crore owed to it by more than 60 of its top 100 wilful defaulters. While 63 accounts in the list have been fully written off, 31 have been partially written off and six have been shown as non-performing assets (NPAs), reveal documents accessed by DNA. As on June 30, 2016, SBI has written off Rs 48,000 crore worth of bad loans. The documents, however, don't specify the entry time of these "write-offs''. India's largest public sector bank has dropped the money, mostly wilfully defaulted, into a specially created dustbin for "toxic loans" called Advance Under Collection Account (AUCA), technically known as a write-off. Information on the bank's clean-up comes a week after the government said it was targeting black money hoarders by demonetizing high-value currency notes, a move that has seen millions queue up outside banks across the country to exchange their money. Now, loans given to Vijay Mallya's Kingfisher Airlines, which heads the wilful defaulters' list with outstanding dues of almost Rs 1,201 crore, and 62 others will not be shown in the bank's balance sheet. Following the defunct airlines in the top 20 write-off list are KS Oil (Rs 596 crore), Surya Pharmaceuticals (Rs 526 crore), GET Power (Rs 400 crore) and SAI Info System (Rs 376 crore). Most of these write-off accounts are those of wilful defaulters. SBI has put all such accounts into AUCA, says its internal report seen by this correspondent. "The main advantage which the bank will have by transfer to AUCA is that banks gross NPAs amount and net additions in NPAs during the quarter will be reduced to the extent of the amount of transfer to AUCA. It will bring down gross advance by the same amount," the reports states. SBI did not send any reply to several emails and reminders sent by this reporter. Questions sent to top five "write-off" companies also didn't get any reply. The top five Kingfisher Airlines owes a total of Rs 6,963 crore to 17 banks, of which SBI's loan is Rs 1,201 crore. Recently, an e-auction of Mallya's Kingfisher Villa in Goa failed to find any buyer. Sources said that SBICAP Trustee did not get earnest money deposit (EMD) from even a single bidder. KS Oil, once a leading edible oil player under the brand names Kalash and Double Sher in the mustard oil segment, turned defaulter and got added to the top 20 list of write-off accounts. KS Oil has allegedly indulged in the diversion of funds from its core business. The company invested huge amounts on plantations in Indonesia and Malaysia but failed to get the expected returns. Though the loan account has been restructured, the company has been unable to revive itself. Lenders have also withdrawn the company from CDR (corporate debt restructure). KS Oil was declared NPA in 2013 with effect from September 30, 2011. As with Kingfisher, the recovery effort was futile as e-auction of five units failed due to lack of bidders. The third in the list of write-off accounts, Surya Pharmaceutical, was named a wilful defaulter in 2013. The company allegedly indulged in fraud, diversion of funds in retail and education sectors. SBI has symbolic possession of eight properties and is struggling for another in Jammu and Kashmir. A forensic audit from E&Y tagged this a fraud account. Ajay Kumar Vishnoi's promoted GET Power Ltd was declared wilful defaulter on August 23, 2016. The company's mismanagement and the delay in projects led to trouble for the promoters. The fifth in the list, Sai Info, has dues of Rs 375 crore and was declared wilful defaulter on August 26, 2016. In June 2013, the company's main promoter Sunil Kakkad absconded but was brought back to India and arrested. Kakkad is now out on bail. The company has cancelled two high value projects – from the Department of Posts and a Mumbai CCTV surveillance project – worth Rs 2,200 crore. This account has also been declared a fraud. SBI could not get any recovery and could only get symbolic possession of some of the properties. What are the write-offs? Banks exercising write-offs is a unique idea to clear bad loan impacts on balance sheets. Banks use the RBI approved tool, Advance Under Collection Accounts (AUCA), in which transfer of accounts to a specific AUCA is an NPA reduction strategy. It is resorted to after exhausting all avenues of recovery, restructuring and compromises. By writing-off bad and doubtful assets, banks can improve NPA ratios through cleansing of the balance sheet and tax benefits. All write-offs, except where one-time settlement or compromises are involved, irrespective of outstanding, should be treated as technical write-offs and parked in AUCA; recovery process of these accounts will continue till resolution of these accounts. (This report first appeared in DNA)

India's largest public sector bank drops loans worth more than Rs 7,000 crore?from 63 defaulters

As China&#39;s economy notches up another quarter of steady growth, the pace of credit creation grows ever more frantic for every extra unit of production, as inefficient state firms swallow an increasing share of lending. 
 
The world&#39;s second-largest economy grew 6.7 per cent in the first half of the year, unchanged from the first quarter, testament to policymakers&#39; determination to regulate the pace of slowdown after 25 years of breakneck expansion. 
 
Analysts say that determination has come at the cost of a dangerous rise in debt which is six times less effective at generating growth than a few years ago. 
 
&quot;The amount of debt that China has taken in the last 5-7 years is unprecedented,&quot; said Morgan Stanley&#39;s head of emerging markets, Ruchir Sharma, at a book launch in Singapore. &quot;No developing country in history has taken on as much debt as China has taken on on a marginal basis.&quot; 
 
While Beijing can take comfort that loose money and more deficit spending are averting a more painful slowdown, the rapidly diminishing returns from such stimulus policies, coupled with rising defaults and non-performing loans, are creating what Sharma calls &quot;fertile (ground) for some accident to happen&quot;. 
 
From 2003 to 2008, when annual growth averaged more than 11 per cent, it took just one Yuan of extra credit to generate one Yuan of GDP growth, according to Morgan Stanley calculations. 
 
It took two for one from 2009-2010, when Beijing embarked on a massive stimulus programme to ward off the effects of the global financial crisis. 
 
The ratio had doubled again to four for one in 2015, and this year it has taken six Yuan for every Yuan of growth, Morgan Stanley said, twice even the level in the United States during the debt-fuelled housing bubble that triggered the global crisis. 
 
Total bond debt in China is up over 50 per cent in the past 18 months to 57 trillion Yuan ($8.5 trillion), equal to around 80 per cent of GDP, and new total social financing, the widest measure of credit provided by China&#39;s central bank, rose 10.9 per cent in the first half of 2016 to 9.75 trillion Yuan. 
 
Short termism 
 
China&#39;s money supply has increased in tandem with new lending, and at 149 trillion Yuan is now 73 per cent higher than in the United States, an economy about 60 per cent larger. 
 
&quot;China is the largest money printer in the world - they have been for some time. The balance is really extreme,&quot; says Kevin Smith, CEO of US-based Crescat Capital. 
 
The reason China gets such poor returns from this pump-priming is that state firms are the main beneficiaries of extra credit, at the expense of the more efficient private sector. 
 
Some of the slowdown in private sector growth is weak confidence in the business outlook, but a lack of access to affordable financing is also a factor, the government and economists say, as banks prefer the security of state-owned borrowers. 
 
Private firms had to pay 6 percentage points more in interest for bank loans in the second quarter versus the public sector, analysts at investment bank CICC estimate. 
 
Though Beijing officially wants to rebalance the economy to the private sector and cut surplus capacity in inefficient heavy industry, that aspiration clashes with its more immediate ambition to hit its growth targets. 
 
For now it seems the latter goal is over-riding the former. 
 
Policymakers say that while corporate debt is high, the central government has room to increase its debt ratios and raise its fiscal deficit to between 4 and 5 per cent to boost the economy. 
 
And analysts expect more monetary easing in the form of interest rate cuts, which will encourage more borrowing and more bad debts. 
 
&quot;We believe that China&#39;s short-termism will only add to its long-standing problems of excess capacity and non-performing loans,&quot; Fathom Consulting analyst Laura Eaton wrote in a note following the release of first-half GDP data. 
 
Smith at Crescat Capital thinks it will lead to a twin currency and banking crisis, with a 20 per cent crash in the Yuan versus the dollar. 
 
&ldquo;It&rsquo;s a question of when, and it looks like it&rsquo;s coming pretty close,&quot; he said. 
 
(Reuters) 
 
&nbsp;

Decline in returns accompanied by increase in defaults and non-performing loans is creating a platform for a major mishap in Chinese economy

As China's economy notches up another quarter of steady growth, the pace of credit creation grows ever more frantic for every extra unit of production, as inefficient state firms swallow an increasing share of lending. The world's second-largest economy grew 6.7 per cent in the first half of the year, unchanged from the first quarter, testament to policymakers' determination to regulate the pace of slowdown after 25 years of breakneck expansion. Analysts say that determination has come at the cost of a dangerous rise in debt which is six times less effective at generating growth than a few years ago. "The amount of debt that China has taken in the last 5-7 years is unprecedented," said Morgan Stanley's head of emerging markets, Ruchir Sharma, at a book launch in Singapore. "No developing country in history has taken on as much debt as China has taken on on a marginal basis." While Beijing can take comfort that loose money and more deficit spending are averting a more painful slowdown, the rapidly diminishing returns from such stimulus policies, coupled with rising defaults and non-performing loans, are creating what Sharma calls "fertile (ground) for some accident to happen". From 2003 to 2008, when annual growth averaged more than 11 per cent, it took just one Yuan of extra credit to generate one Yuan of GDP growth, according to Morgan Stanley calculations. It took two for one from 2009-2010, when Beijing embarked on a massive stimulus programme to ward off the effects of the global financial crisis. The ratio had doubled again to four for one in 2015, and this year it has taken six Yuan for every Yuan of growth, Morgan Stanley said, twice even the level in the United States during the debt-fuelled housing bubble that triggered the global crisis. Total bond debt in China is up over 50 per cent in the past 18 months to 57 trillion Yuan ($8.5 trillion), equal to around 80 per cent of GDP, and new total social financing, the widest measure of credit provided by China's central bank, rose 10.9 per cent in the first half of 2016 to 9.75 trillion Yuan. Short termism China's money supply has increased in tandem with new lending, and at 149 trillion Yuan is now 73 per cent higher than in the United States, an economy about 60 per cent larger. "China is the largest money printer in the world - they have been for some time. The balance is really extreme," says Kevin Smith, CEO of US-based Crescat Capital. The reason China gets such poor returns from this pump-priming is that state firms are the main beneficiaries of extra credit, at the expense of the more efficient private sector. Some of the slowdown in private sector growth is weak confidence in the business outlook, but a lack of access to affordable financing is also a factor, the government and economists say, as banks prefer the security of state-owned borrowers. Private firms had to pay 6 percentage points more in interest for bank loans in the second quarter versus the public sector, analysts at investment bank CICC estimate. Though Beijing officially wants to rebalance the economy to the private sector and cut surplus capacity in inefficient heavy industry, that aspiration clashes with its more immediate ambition to hit its growth targets. For now it seems the latter goal is over-riding the former. Policymakers say that while corporate debt is high, the central government has room to increase its debt ratios and raise its fiscal deficit to between 4 and 5 per cent to boost the economy. And analysts expect more monetary easing in the form of interest rate cuts, which will encourage more borrowing and more bad debts. "We believe that China's short-termism will only add to its long-standing problems of excess capacity and non-performing loans," Fathom Consulting analyst Laura Eaton wrote in a note following the release of first-half GDP data. Smith at Crescat Capital thinks it will lead to a twin currency and banking crisis, with a 20 per cent crash in the Yuan versus the dollar. “It’s a question of when, and it looks like it’s coming pretty close," he said. (Reuters)

China averts slowdown, risks dangerous rise in debt numbers

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