Zombie borrowers haunt China’s shadow banks

China News

Call it the new China Syndrome: Although Asia’s biggest economy is slowing down markedly, credit continues to surge. Dead-end projects and dying industries are sucking up an ever-larger portion of new credit, while more productive borrowers are starved for funds.

Nowhere is this more evident than in China’s shadow banking sector, the non-bank financiers that have pumped credit into the economy at a spectacular rate. Trust companies – firms that sell investment products to Chinese savers and use the proceeds to make loans or buy other types of assets – have posted the fastest growth.

A Reuters examination of proprietary data shows that as little as half of trust loans issued in 2012 were used to finance current economic activity, such as a new investment project or increased production at an existing factory.

The other half may have been used for refinancing old debt that funded past projects but is…

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Do Americans Take Risk Anymore?

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Yesterday’s Wall Street Journal had an interesting article on risk taking.  If there is one thing in this world that I understand its risk taking.  When I was 24, I quit my corporate job to make $150/wk as a runner on the floor of$CME.  I traded for 25 years with only myself to bail me out if things went awry.  Sometimes they did.  It’s walking a tightrope without a net. Now I invest in startups.  Same thing.

Risk taking is an integral part of American DNA.  When Columbus “found” the continent, he took a risk.  When the settlers came, they took massive risk.  There was no turning back-it was life or death.  Many did pass away.  The Revolution was a risk on a massive scale.  It was a binary outcome-freedom and independence, or stiff retribution by another country imposing its will upon them.  The revolutionaries would have been shot, or hung.  Or, if the king was feeling charitable, spent the rest of their life as a prisoner.  America wouldn’t be here without individuals assuming risk.

There are significant trends that are sapping the risk taking ability of the United States citizenry.

One data point that the Wall Street points out is our population is older.  Older people assume less risk because they have more to lose. That’s why younger people do a lot of the startups.  Ironically though, it’s the older people that should be taking on a little more risk.  They have a lot of expertise and knowledge about individual business sectors.  Many times, they can transfer that knowledge into a scalable business. In addition, they might have the financial wherewithal to bootstrap the business along for a longer period of time.  If the business fails, it doesn’t hurt them as much because they have something to fall back on.

Companies are taking less risk.  ”Companies, too, are taking fewer risks. Rather than expanding payrolls, for example, they are keeping more cash on hand—5.7% of their assets at the end of 2012, up from under 3% three decades earlier, said the Federal Reserve, a rise that accelerated after the recession. Workers are hired more slowly, particularly at newer companies, Labor Department data show.”

This is purely because the economic incentives don’t line up correctly for them. The government sets those incentives.  High regulation, high taxes, and the decision in the trade off between investing in more capacity and holding cash point to holding cash. Obamacare and other government mandates make it very expensive to hire more employees.  Overwhelmingly high corporate taxes create cottage industries within companies that try to keep from being taxed instead of using that brainpower to innovate.  Change the incentives and company behavior will change…

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