Fear mongering
continues with this piece here. A lot of
cash has been dumped into the Chinese economy and we do have an artificial
sector that is sucking it up. Yet a
transition of all that debt into consumer debt could fuel consumption
also. Yet I am not sure anyone knows
where to go from here.
China’s real problem is
that it has reached maximum utilization of its cheap labor market and high
margins are now coming down. Huge sales
increases now becomes difficult and thus borrowing money has become very
dangerous.
The way out will not be
easy and a general contraction of the credit balloon appears inevitable. The hard part is to avoid actually shuttering
viable business assets.
Otherwise, I am not so
sure that the Chinese have not been underwriting overseas business in order to
secure raw materials such as oil and this is underpinned by their massive cash
position and ample bank credit.
I find it plausible
that the technocrats are using internal credit to underwrite effective sales to
overseas joint ventures on a grand scale.
The $23 Trillion Credit
Bubble In China Is Starting To Collapse – Global Financial Crisis Next?
By
Michael Snyder, on January 20th, 2014
Did
you know that financial institutions all over the world are warning that we
could see a "mega
default"
on a very prominent high-yield investment product in China on January
31st? We are being told that this could lead to a cascading collapse of
the shadow banking system in China which could potentially result in "sky-high
interest rates"
and "a
precipitous plunge in credit".
In other words, it could be a "Lehman Brothers moment" for
Asia. And since the global financial system is more interconnected today
than ever before, that would be very bad news for the United States as
well. Since Lehman Brothers collapsed in 2008, the level of private
domestic credit in China has risen from $9
trillion to an astounding $23 trillion. That is an increase of $14
trillion in just a little bit more than 5 years. Much of that "hot
money" has flowed into stocks, bonds and real estate in the United
States. So what do you think is going to happen when that bubble
collapses?
The
bubble of private debt that we have seen inflate in China since the Lehman
crisis is unlike anything that the world has ever seen. Never before has
so much private debt been accumulated in such a short period of time. All
of this debt has helped fuel tremendous economic growth in China, but now a
whole bunch of Chinese companies are realizing that they have gotten in way,
way over their heads. In fact, it is being projected that Chinese
companies will pay out the equivalent of approximately
a trillion dollars in
interest payments this year alone. That is more than twice the amount
that the U.S. government will pay in interest in 2014.
Over
the past several years, the U.S. Federal Reserve, the European Central Bank,
the Bank of Japan and the Bank of England have all been criticized for creating
too much money. But the truth is that what has been happening in China
surpasses all of their efforts combined. You can see an incredible
chart which graphically illustrates this point right
here.
As the Telegraph pointed out a while
back,
the Chinese have essentially "replicated the entire U.S. commercial
banking system" in just five years...
Overall
credit has jumped from $9 trillion to $23 trillion since the Lehman crisis.
"They have replicated the entire U.S. commercial banking system in five
years," she said.
The
ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP,
compared to roughly 40 points in the US over five years leading up to the
subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This
is beyond anything we have ever seen before in a large economy. We don't know
how this will play out. The next six months will
be crucial," she said.
As
with all other things in the financial world, what goes up must eventually come
down.
And
right now January 31st is shaping up to be a particularly important day for the
Chinese financial system. The following is from a
Reuters article...
The
trust firm responsible for a troubled high-yield investment product sold
through China's largest banks has warned investors they may not be repaid when
the 3 billion-yuan ($496 million) product matures on Jan. 31, state media
reported on Friday.
Investors
are closely watching the case to see if it will shatter assumptions that the
government and state-owned banks will always protect investors from losses on
risky off-balance-sheet investment products sold through a murky shadow banking
system.
If
there is a major default on January 31st, the effects could ripple throughout
the entire Chinese financial system very rapidly. A recent
Forbes article explained
why this is the case...
A
WMP default, whether relating to Liansheng or Zhenfu, could devastate the
Chinese banking system and the larger economy as well. In short,
China’s growth since the end of 2008 has been dependent on ultra-loose credit
first channeled through state banks, like ICBC and Construction Bank, and then
through the WMPs, which permitted the state banks to avoid credit
risk. Any disruption in the flow of cash from investors to dodgy
borrowers through WMPs would rock China with sky-high interest rates or a
precipitous plunge in credit, probably both. The
result? The best outcome would be decades of misery, what we saw in
Japan after its bubble burst in the early 1990s.
The
big underlying problem is the fact that private debt and the money supply have
both been growing far too rapidly in China. According to
Forbes,
M2 in China increased by 13.6 percent last year...
And
at the same time China’s money supply and credit are still
expanding. Last year, the closely watched M2 increased by only
13.6%, down from 2012’s 13.8% growth. Optimists say China is getting
its credit addiction under control, but that’s not correct. In fact,
credit expanded by at least 20% last year as money poured into new channels not
measured by traditional statistics.
And
of course China is not the only place in the world where financial trouble
signs are erupting. Things in Europe just
keep getting worse,
and we have just learned that the largest bank in Germany just suffered " a surprise fourth-quarter
loss"...
Deutsche
Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a
steep drop in debt trading revenues and heavy litigation and restructuring
costs that prompted the bank to warn of a challenging 2014.
Germany's
biggest bank said revenue at its important debt-trading division, fell 31
percent in the quarter, a much bigger drop than at U.S. rivals, which have also
suffered from sluggish fixed-income trading.
If
current trends continue, many other big banks will soon be experiencing a
"bond headache" as well. At this point, Treasury Bond sentiment
is about the lowest that it has been in
about 20 years.
Investors overwhelmingly believe that yields are heading higher.
If
that does indeed turn out to be the case, interest rates throughout our economy
are going to be rising, economic activity will start slowing down significantly
and it could set up the "nightmare
scenario"
that I keep talking about.
But
I am not the only one talking about it.
Fiscal
crises triggered by ballooning debt levels in advanced economies pose the
biggest threat to the global economy in 2014, a report by the World Economic
Forum has warned.
Ahead
of next week's WEF annual meeting in Davos, Switzerland, the forum's annual assessment of
global dangers said high
levels of debt in advanced economies, including Japan and America, could lead
to an investor backlash.
This
would create a "vicious cycle" of ballooning interest payments,
rising debt piles and investor doubt that would force interest rates up
further.
So
will a default event in China on January 31st be the next "Lehman Brothers
moment" or will it be something else?
In
the end, it doesn't really matter. The truth is that what has been going
on in the global financial system is completely and totally unsustainable, and
it is inevitable that it is all going to come horribly crashing down at some
point during the next few years.
It
is just a matter of time.
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