NPLs and household consumption
How much was the value of the transfer?  It’s hard to say, but we can make some estimates.  Over the past decade nominal lending rates in China have been about 6% while nominal GDP growth rates have been 14%.  Economic theory tells us that nominal interest rates should be equal to nominal GDP growth rates if providers of capital are to earn their fair share of growth, and in fact in developed countries the relationship holds pretty well.  However Jonathan Anderson at UBS put together a very interesting analysis in a November 12, 2009, report that argued that it was wrong to assume Chinese nomnal interest rats should be equal to its nominal growth rate.  He looked at the case of other developing countries and found that there was no obvious relationship between the two.
But I am not convinced.  First off, if nominal interest rates are much lower than nominal growth rates, then almost by definition the providers of capital are getting less than their share of the benefits.  Since the providers in China are mainly households, and the users of capital are businesses, speculators, and the government, this must represent a real transfer of wealth from households – which I think Anderson acknowledges, although he argues that the high savings rate is an independent variable that drives the low interest rate, whereas I think that it is one of the consequences of low interest rates and other policies that force households to subsidize production (and so force up the gap between production and consumption, which is the savings rates).
Secondly, his sample includes a lot of developing countries with closed or sticky capital accounts, and who intervene in their currencies, most especially the countries that followed the so-called Asian development model.  These countries have systematically repressed interest rates – in fact that is for me one of the definitions of the Asian development model.  This makes their inclusion in a statistical sample to determine the “correct” level of interest rates very questionable. He also includes a lot of OPEC countries who for totally different, and explainable, reasons have very low interest rates, and these too create a downward bias in the statistical sample.
Finally from his own numbers, even with the possibility of significant statistical bias, I would say that there does seem to be a reasonable relationship between nominal interest rates and nominal growth rates.  On average nominal interest rates have been roughly two-thirds of nominal growth rates, although there is wide dispersion around the mean, which we would expect if interest rates were repressed.  With nominal growth rates of 14% during the past decade, this implies that nominal interest rats should have been nearly 10% or a little less, versus the actual 6%.
This is not a very scientific way of going about it, but my very back-of-the-envelope estimate suggests that interest rates in China, without financial repression, would have probably been anywhere from 300 to 800 basis points lower than the appropriate equilibrium level during the past decade.  Add this to the excess spread between deposit and lending rates, which is anywhere from 150 to 250 basis points, and we could easily argue that the deposit rate is at least 450 basis point lower than it should be, and perhaps an awful lot more.
How much is that in GDP terms?  A quick call to my friend Logan Wright at Medley Advisors gave me the following data. Total banking deposits in China are around RMB 64 trillion.  Around 60% of the total represent household deposits (an estimate, since there is some ambiguity in the numbers).  Total GDP is nearly RMB 34 trillion.  Inputting all of that into my trusty Excel Spreadsheet suggests that at a minimum, households have “paid” in form of excessively low rates on their deposits a minimum of 5% of GDP every year, and possibly up to two times that amount, during the past decade.
This is, to me, an astonishing number.  Every year households may have transferred at least 5% of GDP to the banks, and possibly a lot more.  Now of course they are paying for a many other things than simply recapitalizing the banks.  They are also paying to keep the cost of capital low so as to make viable a whole series of investments – manufacturing investments, real estate investments, infrastructure investments, PBoC sterilization bills, other government bonds, etc – that might be considered non-economic investments and that would otherwise show negative returns (in fact excessively low interest rates, as the various recent US bubbles clearly indicate, almost always lead to misallocated investment).  But since a lot of this investment occurs through the banking system anyway (for example banks directly or indirectly buy most sterilization bills), much of this ends up as part of the bank clean-up.
By the way forcing unlucky households to clean up the banks is pretty standard in the annals of banking crises, and for example has occurred in the US with the recent bank bailouts (which of course were paid for with taxpayer money), but not only was China’s total bill over many years much higher, because of its domestic distortions the impact in China was worse than it would have been in the US (because forcibly reducing consumption in China is much worse than doing the same might be in the US). Added to the other major transfers from the household sector (the undervalued exchange rate, and slow wage growth relative to productivity growth), and given the sheer size of the clean-up, it is perhaps not surprising that during the period of the bailout, household income, already a relatively low share of GDP, declined to alarming levels. This happened even in spite of explicit and much-publicized attempts by Beijing to raise the household consumption share of GDP.
This, then, is the real risk of another bout of rising non-performing loans in China. It is not that China’s banks are likely to collapse. It is illiquidity that causes bank collapses, and unless capital controls are sharply undermined we are not likely to see this happen in China. Debt levels are certainly high and highly pro-cyclical, but even if the banks are insolvent Beijing largely controls domestic funding and domestic interest rates and can protect itself from the bank runs that plagued US and European banks. We saw the same thing in Japan thirty years ago, when it was able to fund the massive banking bailout and soaring government debt levels, to what would earlier have seemed like unimaginable levels. Like Tokyo in the 1990s, Beijing is in a strong position to continue to fund its rising bank-related liabilities and will not have a debt problem any time soon. Government debt levels are indeed very high, but they can go much higher.
This doesn’t mean however that we don’t need to worry about the debt, and it certainly does not mean that if China runs up more bad loans as a consequence of the recent lending spree it will simply “grow” its way out. In the past China could certainly grow its way out, even with household consumption declining as a share of GDP, because one effect of declining relative consumption – a rising savings rate along with a rising trade surplus – was easily absorbed by a rapidly growing world economy. As long as debt levels in the US and other deficit countries could easily rise to counteract the adverse employment effect, the world, and especially the US, had no trouble with absorbing China’s rising trade surpluses.