Wednesday's Top 10 with NZ Mint: China's property-lending steel SOE; China's (political) trainwreck; Europe's financial trainwreck; Greece's (not so silent) bank run; Dilbert

Here's my Top 10 links from around the Internet at 4 pm in association with NZ Mint.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

Something ugly is brewing in China around this train crash.

1. Steel plated arbitrage - Caixin reports from China that some state-owned manufacturers are turning themselves into loan sharks to help property developers get around the official curbs on lending in China.

Sound familiar? Finance companies in New Zealand helped property developers get around restrictive lending policies by banks. Often the property developers built their own finance companies to raise money from the public.

Sound dangerous? How sensible does it sound for a state owned manufacturer to borrow from the state at 10% and lend to a property developer at 94%...

Sound unsustainable?

I've harped on this a few times. Those expecting China to keep growing ad infinitum are being a tad optimistic given the explosion in bad loan growth in the last three years as China scrambled to deal with a slump in the source of its export growth -- America. Essentially China kept growing by encouraging rampant lending growth in property development.

A collapse of its overheated property market wouldn't wipe out China's banks, but it might slow things down a bit.

Here's Caixin on the shenanigans going on in China right now. HT a commenter on a Leith article at Macrobusiness

Policymakers have also forced banks to freeze lending to the credit-hungry property development sector.

"Real estate developers currently rely mainly on private lending for their cash flow," a bank executive said. "One real estate developer borrowed a few hundred million yuan at a 60 percent interest rate per annum."

Indeed, such high interest rates have not stopped an increasing number of companies from reacting to policy tightening by turning to private lenders including individuals and companies, such as steel manufacturers, said a risk control manager at a loan guarantee firm.

Annual interest rates for private loans from steelmakers are usually 36 to 94 percent, for example, at a time when banks charge some large, state-owned companies less than 10 percent.

2. China's increasingly bolshie citizens - The outrage triggered on the ground in China by the train crash filtered pretty quickly into the media and social networks. Over the weekend the government clamped down.

But a lot of anger seeped out into the public in the meantime.

Here's Damien Ma at The Atlantic with a nice roundup of the Chinese reaction.

Firstly this on-air comment from CCTV (state TV) anchor  Qiu Qiming

"If nobody can be safe, do we still want this speed? Can we drink a glass of milk that's safe? Can we stay in an apartment that will not fall? Can the roads we travel on in our cities not collapse? Can we travel in safe trains? And if and when a major accident does happen, can we not be in a hurry to bury the trains? Can we afford the people a basic sense of security? China, please slow down. If you're too fast, you may leave the souls of your people behind."

And then this video below:

In the "subversive" category, I present you this video* that creates a montage of the rail accident and its aftermath to the soundtrack of that infamous '80s Chinese rock anthem "Nothing to My Name

For those unfamiliar with Cui Jian, he rose to prominence in the tumultuous late '80s with that hit rock single. It seemed to have captured the zeitgeist better than anything else, as Chinese youth grappled with the sense of waywardness during the first decade of discombobulating economic reforms. Cui's ballad was then coopted by students during that memorable summer of 1989 in that famous Beijing square. 

 

I don't want to draw breathless, and in all likelihood unfounded, parallels to that summer of discontent. But is it just pure nostalgia for Cui Jian and the '80s? Or is this a subtle message that prompted the hasty removal of the original video on Tudou? 

3. Ill gotten gains - Guess how much the deputy engineer of China's Ministry of Railways might earn?

US$2.8 billion?

Forbes' Ray Kwong points out his monthly salary is US$1,240 but he apparently had US$2.8 billion stashed in Swiss and US bank accounts. He also has three luxury homes in Los Angeles and his wife and daughter live in in America.

No wonder people are asking questions about high speed train safety...

New Zealand should be appropriately diligent with our due diligence checks on wealthy Chinese officials/entreprenuers coming here to buy hard assets with US dollars.

Also. Are we sure the trains Kiwirail is planning to buy from China are safe and corruption free?

Here's Forbes.

According to CCTV, the state-owned television broadcaster in China, Zhang Shuguang, the former deputy chief engineer at the Ministry of Railways, is accused of having deposits abroad of $2.8 billion, reportsTom Lasseter from McClatchy Newspapers. Zhang’s former boss, Liu Zhijun, the Railways minister, is accused of walking off with $155 million.

Both officials were suspended in February on graft charges. The figures had been circulating previously on China’s rumor mill, but the report by CCTV appeared to be an official confirmation, writes Malcolm Moore ofThe Telegraph. At least five former senior officials at the Railways ministry are now under investigation for corruption.

Zhang is regarded as the “father of China’s high-speed railways,” according to Asia Times. He supported Liu’s plans for “leapfrog development” by building a $300 billion high-speed rail network covering nearly 10,000 miles by 2015.

4. Why US Treasuries are so strong - Essentially fund managers are pulling out of Europe and need somewhere to put their money.

Guggenheim Partners CIO Scott Minerd, who manages US$100 billion in bonds, says Europe is on the brink of a major financial crisis. The comments via CNBC are below.

"The way Europe is operating right now, it's what I called recently 'cognitive dissonance,'" Minerd said, or "basically doing the same thing thinking they're going to get a different outcome."

"They keep throwing more and more liquidity at it thinking it's going to get better and it's not," he added. Europe fails to recognize that it has a "structural problem, not a liquidity problem."

People will "flee the euro" unless they find a way to bifurcate the euro in some way where strong countries are in the euro only and the weak countries are out, Minerd explained, adding, "To be honest with you, I don't see the mechanism to do that."

5. Here's Nouriel Roubini's artwork - It's a chart showing the growing disparity in US wealth in the 1920s and 2000s, which are now the 'Two Gilded Ages'.

Who is the F. Scott Fitzgerald of our time? Paris Hilton?

The art work is a chart in the American flag on top of share prices.  It shows the income share of the top 1% of the population & bottom 90% from 1915 to 2010.

I wonder how much it cost Roubini...

And how much he's worth now...

And here's a more legible version of the chart showing the top 0.5% earn 18% of income...

6. When did America's empire begin unraveling? - Stephen Walt writes at Foreign Affairs that Saddam Hussein's invasion  of Kuwait in 1990 was the moment.

It forced America to put troops and planes on the ground in Saudi Arabia, which led to Al Qaeda, which led to the Iraq and Aghanistan wars and the Bush tax cuts...

You can guess the rest...

Not only did "Mission Accomplished" soon become a costly quagmire, but wrecking Iraq -- which is what we did -- destroyed the balance of power in the Gulf and improved Iran's geopolitical position. The invasion of Iraq also diverted resources away from the war in Afghanistan, which allowed the Taliban to re-emerge as a formidable fighting force. Thus, Bush's decision to topple Saddam in 2003 led directly to two losing wars, not just one.

And these wars were enormously expensive to boot. Combined with Bush's tax cuts and other fiscal irresponsibilities, this strategic incompetence caused the federal deficit to balloon to dangerous levels and helped bring about the fiscal impasse that we will be dealing with for years to come.

7. Greek bank run - The Guardian reports on how many Greeks are pulling their euros out of their banks.

It's now very difficult to buy safety deposit boxes in Greece.

The boxes are so popular that the bank has doubled the rent on them in the past year – and still every day between five and 10 customers request one. This bank ran out of spares months ago. The clerk leans over: "I've been working in a bank for 31 years, and I've never seen a panic like this."

Official figures back him up. In May alone, almost €5bn (£4.4bn) was pulled out of Greek deposits, as part of what analysts describe as a "silent bank run". This version is also disorderly and jittery, just not as obvious. Customers do not form long queues outside branches, they simply squirrel out as much as they can. Some of that money will have been used to pay debts or supplement incomes, of course, but bankers put the sheer volume of withdrawals down to a general fear about the outlook for Greece, one that runs all the way from the humble rainy-day saver to the really big money.

"Every time the markets move, I get phone calls," says an Athens-based fund manager. "They're from investors asking: 'How can I get my money out of the country?' "

8. Now that's what I call a disincentive - The mayor of Vilnius in Lithuania has taken to driving a tank over cars parked illegally...

9. How the Gold price follows the US debt ceiling - Now America has agreed to raise its debt ceiling, what might happen to the gold price?

It might rise to almost US$2,000/oz, this chart suggests...

Here's a Zerohedge chart:

10. Totally Jon Stewart's take on the Debt Ceiling debacle. He makes Obama look lame.

Not hard.