Is China’s “credit frenzy” for real?  Some analysts, including Jim Grant of Grant’s Interest Rate Observer, are beginning to question this historic run up.

In the January 24 issue, Jim Grant notes that from year-end 2008 through the third quarter of 2013, Chinese bank balance sheets swelled, growing by $15.1 trillion, larger than the $14.6 stock of assets at American commercial banks.  For perspective, Grant notes that China’s reported GDP is $8.9 trillion compared to the US GDP of $16.7 trillion. In other words, China’s economic output is 12.2% of world GDP while their bank assets represent 33.1% of world GDP.

Specifically Grant notes:

HERETOFORE UNIMAGINED The world has never seen the likes of China’s credit frenzy. From year-end 2008 through the third quarter of 2013, assets on the balance sheets of Chinese banks grew by $15.1 trillion to $24.3 trillion. That growth in assets is greater than today’s $14.6 trillion stock of assets at American commercial banks. For further perspective, China’s GDP is reported to sum to $8.9 trillion, America’s to $16.7 trillion. (U.S. national income data should be taken with a grain of salt; for China’s, empty the cellar.) China’s bank footings represent 33.1% of world GDP, though China’s economic output amounts to just 12.2% of world GDP. In 1994, when Japan had the world on a string, Japanese output peaked at 17.9% of global production; in the same year, Japanese banking assets topped out at 27.3% of world GDP. Nineteen years later, Japan’s share of earthly GDP has shrunk to 6.8%, its banking assets to 11.8% of that all-in figure. 

Does it add up?

Jim Grant china

Jim Grant notes that in 1994, “when Japan had the world on a string,” Japanese output peaked at 17.9% of global production while Japanese banking assets topped at 27.3%.  Nineteen years later, Japan’s once superhero share of GDP has shriveled to a rather human-like 6.8% of world output, and its banking assets to 11.8%.

Jim Grant: The Cinda tangled web

Jim Grant starts to dive down a rabbit hole when he references Cinda, the China Cinda Asset Management Co Ltd (HKG:1359), which was created to soak up bad bank loans in the Asian nation but has since spread its wings to buying distressed assets, such as bad debts between companies.  Cinda’s much celebrated IPO occurred in early December and the firm will likely be at the center of any “credit frenzy” if it should occur. “Ultimately, something tells us, Cinda will be a balance-sheet story rather than an earnings story, but the quality of the earnings is already an open question,” Grant writes. 

First banking IPO

Cinda, the first Chinese bank IPO, is trading at 16 times projected 2013 net income and at 12.6 times the 2014 estimate, Jim Grant points out.  “Not cheap, is our reading of the facts and figures,” he dryly suggests.  While Cinda was the first Chinese bank IPO, others are in the pipeline.  These include China Huarong Asset Management Company, the asset-management company founded to scrub Industrial and Commercial Bank of China (SHA:601398) (HKG:1398) 15 years, is making this list along with China Orient and Great Wall Asset Management Corp.

Great Wall in particular has been aggressive in courting Western asset managers, as they are said to have an arrangement with Winton Capital Management, the algorithmic managed futures trading fund based in London.  The Chinese derivatives brokerage and asset manager soon may be opening a Chicago office.  Four additional Chinese asset management firms are scheduled to open offices in Chicago in 2014, highlighting how the Chinese are beginning to liberalize their markets.