"There is danger from all men. The only maxim of a free government ought to be to trust no man living with
power to endanger the public liberty." - - - - John Adams

Friday, June 21, 2013

China's Credit Bubble is Bursting - Will the Banks Fail?

China's credit bubble is unprecedented in world history
  • China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts.
  • The Shanghai Interbank Offering Rate jumped from around 4% towards 10% in a matter of days signaling a heightened level of financial stress.

The unprecedented level of credit expansion in China has gotten to the point where it dwarfs anything we’ve seen before with overall credit now at about $23 trillion, making a severe banking crisis a very real possibility.

Question of the day  -  No one has seen a credit bubble of this size burst.  Will a Chinese implosion shove the U.S. and world economy into some lower Hell?

With a shadow banking system that is becoming increasingly prominent, the rise of bundling of assets and securitization, and an acceleration of policy tightening, over-indebted local governments and institutions will feel the pain of a rising cost of capital, prompting Fitch Ratings to raise red flags about the future growth prospects of the Chinese economy reports Forbes.

At Nomura, where they noted that liquidity tightening is dangerous in a highly leveraged economy, they increased their probability that a risk scenario could push GDP growth below 7% this year, threatening social stability.

The world’s second largest economy could be on the verge of a dramatic financial sector meltdown that could jolt the globe.

With a “credit-driven growth model [that] is clearly falling apart” and facing the specter of “Japanese-style deflation,” the risks have definitely increased, explained Fitch’s Charlene Chu, cited by The Telegraph’s Ambrose Evans-Pritchard.

The Chinese financial sector is definitely sending out some dangerous signals. Overall credit has grown from $9 trillion to $23 trillion in the five years.

A major problem is that much of this incredible surge in credit has been channeled through the shadow banking sector, which is very closely connected to the banks.

China's Ghost Cities and Malls 

Chinese "ghost city" of new towers with no residents
Desolate condos and vacant subdivisions uninhabited for miles, and miles, and miles, and miles of empty apartments.
Property values have doubled and tripled and more -- so people in the middle class have sunk every last penny into buying five, even 10 apartments, fueling a building bonanza unprecedented in human history. No nation has ever built so much so fast.
. It's the main driver of growth and has been for the last few years. Some estimates have it as high as 20 or 30 percent of the whole economy.
There are multiple classes of people that are going to get wiped out by this. People who have invested three generations worth of savings -- so grandparents, parents and children - into properties will see their savings evaporate. And then there are 50 million construction workers who are working on all these projects around China.

See our articles:  Chinese real estate bubble bursts
The Great Depression is coming to China

Empty homes for miles and miles and miles.

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