Chinese debt is seen as a “timebomb” by some observers. Some famous hedge fund managers in the US especially are betting that China will one day experience a banking collapse. What are they missing?
Immediately after the Global Financial Crisis in 2008, China’s exports dropped sharply, rapidly halving in US Dollar terms. This 50% drop alarmed the Chinese government so they decided to stimulate the domestic economy with a dramatic surge in infrastructure expenditure funded by a liquidity injection into their banking system in order to speed domestic credit creation. The Chinese banking sector was encouraged to make loans principally to the large State owned enterprises that were responsible for building infrastructure roads, bridges, tunnels, airports, ports. In other words, State owned banks created loans to State owned companies. This is very different to a credit stimulation program in a western, capitalist economy which takes time as borrowers emerge slowly. A major difference is the speed that can be achieved in placement of funds inside a command economy. And it is different to the government issuing bonds to investors to raise the funds necessary to fund government led infrastructure spending (the normal route in Western economies). Again, speed is a limiting factor in such a funding mechanism.
This huge increase in infrastructure spending inside China had a stimulatory effect on the whole planet as the rest of the world supplied all the ingredients for the increased steel, aluminium and concrete production. China continues to contribute about 30% each year to Global GDP growth.
Over the last 4 years, China’s bank loans have expanded dramatically every January as commanded by the central command. It has become an annual affair.
The key element to consider in all this bank loan debt (and all bank originated debt everywhere) is this — what is the possibility of default? The fact is that the risk here is low. For full default to occur, the Chinese central government would have to abandon its fully owned banks and its fully owned construction sector to a rolling default risk. This is just not going to happen in a command and control, one party system.
So where is the risk of all this bank originated debt? As always, the answer lies in CPI inflation risk and currency devaluation risk. China’s CPI inflation rate since 2008 has averaged about 1.5% per annum. At present, it is at 1.8 %. So, there has clearly been no CPI inflation surge.
The Yuan currency has averaged about 6.6 to the US Dollar since 2008. It has cycled as high as 6.97 and as low as 6.04. But there has been no significant drop in price versus the major international reserve and settlement currency, the US Dollar.
So, relax, in a world of uncertainty, China’s banking sector seems relatively stable and relatively amenable to default management once a true understanding of Chinese debt is factored in.
The other matter worth considering is Chinese external debt — debt owed to foreign entities. It is currently estimated at just 16 % of GDP. That is a tiny figure when compared to other nations. In the Top 100 nations list of External Debt, there is only one other nation with a lower figure and that is Bangladesh.
PROPERTY & SECURITY TOKENIZATION
The property industry is ripe for disruption. Many other industries have already seen the huge impact of new technologies and new business models. The taxi industry has been disrupted by the arrival of Lyft and Uber — companies that own no cars. And the accommodation industry has been disrupted by Airbnb — a company that owns no accommodation. So how can new technology and new business models disrupt the property market?
To understand the answer, you must come to terms with the complex world of Crypto and especially the coming rise of Security Tokens.
You may know nothing about Bitcoins or blockchains. And being blissfully unaware sounds comforting but, if you ask any taxi owner, you will soon be warned to pay attention. The Crypto world started with Bitcoin being issued on a blockchain in 2008. Confused already? Relax — a blockchain is just a fancy word for a new form of self maintaining database and we are all very familiar with what a database is and what it can do.
Since 2008, we have moved through the promise of alternative currencies, the promise of better payment systems, the promise of “utility coins” and the promise of these digital “coins” being a possible store of wealth. After 10 years, it is now obvious that most of those over-hyped promises have not been fulfilled.
However, the next iteration of this phenomenon has already started and that is where the property market could be disrupted. This new phenomenon is the digital tokenization of anything of present or future value — including assets, future assets, revenues, future revenues, profits, future profits, cash flows and future cash flows. This is called Security Tokenization and it is very different to all the previous iterations of the blockchain world. Why? Because it is concentrated on being strictly legal, accepting at the outset that these digital “tokens” are, in fact, securities and that their issuance complies fully with Securities Law.
So — how can Security Tokenization change the world of property?
The fact is that it already has. The St Regis Aspen Ski Resort in the USA late last year issued a number of digital tokens as a “Tokenization” of their REIT (Real Estate Investment Trust) and sold those tokens to private investors for US $ 18 Million. It was an offer only to “accredited investors” which generally means high net worth or very high income individuals. The minimum investment amount was $ 10,000. In this case, as far as I am aware and to the best of my knowledge, Aspen token holders were not granted any voting rights. Token holders may receive distribution payments in the future but that was not guaranteed. They are “locked in” investors for 12 months which means they cannot sell during that time period. Despite all these negatives, the capital raise was successful.
The website describing the investment offer (in general terms) is still online at
A media article on the matter is here — https://venturebeat.com/2018/10/09/elevated-returns-gets-18-million-for-st-regis-aspen-resort-tokenized-real-estate/
Quote: “An Elevated Returns spokesperson wrote, “We’ve tokenized a portion of the St Regis Aspen which we formed as a single asset real estate investment trust (REIT). In accordance with the terms of the deposit agreement, each Aspen Digital Token will represent an indirect ownership interest in one deposited share of our common stock (the REIT which was formed for St. Regis Aspen). Essentially you have best of both worlds with REIT structure in place and blockchain technology with smart contract for St. Regis Aspen. The REIT provides tax efficient structure while the blockchain provides peer-to-peer investing and cross-border transaction made simpler for investors.” Unquote.
Not long after, a US company called tZero issued tokens to raise US$ 134 Million. They proposed to become a sponsor, a mentor company, to help other companies move into the world of Tokenization. They also planned to establish an online exchange for the secondary market trading of security tokens. You can read a media article about that here — https://medium.com/swlh/tzero-successful-migration-from-an-ico-to-sto-platform-launch-awaited-498957bdd076
And, just 2 weeks ago, a German company called BitBond issued the first German Bond-like financial security as a Token. That financial instrument was approved by the German regulatory agency.
It offered a Security Token with a 10 year duration. Interest of 4% is payable annually (1% per quarter) plus a variable bonus coupon payment annually. It is called the BitBond Token (BB1). After 10 years, the BB1 matures and is bought back at its original face value of 1 Euro per token. The funds raised will be used to create loans for SMEs based all around the world.
The issuer of the token is Bitbond Finance GmbH, a company fully owned by Bitbond GmbH. Bitbond is a crypto-currency based lending platform for business loans that operates globally. Founded in 2013, Bitbond now facilitates more than $1 million in business loans every month.
Germany’s first security token will be issued on the Stellar blockchain. With a processing capacity of over 1,000 transactions per second, transaction costs at a fraction of a cent, a built in decentralized exchange and a global network of active partners using the platform, Stellar is one of the most efficient blockchains for payment processing and token issuance.
Who can invest in the BB1 token? Answer — Anybody around the world who is not a US or Canadian citizen. The project received approval to issue this tokenized bond from Germany’s Federal Financial Supervisory Authority (BaFin).
BitBond are hoping to raise a maximum of US$ 113 Million and a minimum raise of $ 3 Million.
BOOM has summarized the history of Blockchain technology in some detail in previous editorials but here are the key points —
1. The first Cryptology BlockChain paper occurred in 1991 — 27 years ago. It was essentially a cryptographic description of a “chain of blocks”.
2. The National Security Agency of the USA (the NSA) released a paper on 18th June 1996 — 22 years ago. “How to Make a Mint – The Cryptography of Anonymous Electronic Cash”. It was published by MIT October 31st 1996 — the Massachusetts Institute of Technology.
3. Satoshi Nakamoto released the original paper on Bitcoin on October 31st 2008 on Bitcoin.org. The Source Code was implemented early 2009 — 10 years ago.
Bitcoin was the first so-called “digital coin” that was created and promoted as an alternative currency even though all national currencies are digital and have been digital for over 50 years since computer ledgers were developed by the banking industry. Since Bitcoin was launched, thousands of such “digital coins” have been created and sold in exchange for national currencies. Some say that this is the greatest crime of fraud ever perpetrated in history. People have essentially handed over hard earned fiat currency for various packets of data that had some rather questionable claims attached.
But the new Crypto world of Security Tokenization is very different indeed.
POLITICIANS AND LIES
There is an old saying “How can you tell if a politician is telling a lie?” Answer “Wait for their lips to move”.
This is particularly evident in Australian politics at present where a Federal election is brewing and where climate change is an issue paraded around especially by the Left side of politics as if it has a magical global solution. The Australian Greens political party is vociferously adamant at suggesting that only they can save the entire planet by changing the way their nation generates electricity. It all sounds convincing (to some) until the facts are considered.
The problem with this promise is that Australia only creates 1% (or possibly less) of the total electricity generated on the planet. The suggestion that the planet will be saved rapidly by moderating just 1% global contribution away from coal is ridiculous. But few notice the dis-connection with the real world in such promises. Those lips can dazzle and muddle the brains of many voters.
The facts:- From Enerdata — established by the Indian Ocean Commission (IOC). The IOC has been in partnership with the European Union for 25 years.
Total Global Electricity generation is 25,000 Terra Watt Hours of energy (TWH). Australia produces 255 TWH. That is just 1%.
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
EMAIL: gerry [@]
HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“
“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans”
“In the first instance, the process of money creation requires a willing borrower.”
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
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