Posted on 24 December 2013 with no comments from readers
The Financial Times reports that China has banned journalists from writing pessimistic articles about its economy, the latest in a desperate effort to prevent the $24 trillion Chinese debt mountain from imploding as local interest rates skyrocket.
Blame the Fed for its reduction of QE money printing last week. The three-month Chinese Shibor interest rate is up 80 points to 5.5 per cent over the past month. This is a credit squeeze as hot money is pouring out of China.
Most vulnerable are China’s so-called ‘wealth management products’ that are highly leveraged to juice gains. Fitch Ratings says this ‘hidden second balance sheet’ totals around $2 trillion. Indeed the sums of money involved in the Chinese credit expansion are huge.
Credit has been expanding at 20-30 per cent per annum for the past five years since the global financial crisis. That’s way ahead of 7.5-8 per cent official GDP growth
Total credit has ballooned from $9 trillion to $24 trillion in five years, and is now equal in size to the US and Japanese banking systems added together, the biggest bubble in history. It is obvious to many observers that much of the GDP expansion of the past five years is simply monetary inflation and an illusion created under a cloud of acrid smog.
The problem with any debt bubble is that all seems perfectly well until the bubble suddenly goes pop. China is now coming closer and closer to that point. The rich have gotten as much as they can out of the country before this happens in a movement of money unlike anything since the Russian oligarchs in the late 1990s. London’s two top real estate owners are Chinese, for example.
Chinese gold rush
Chinese older ladies, the famous aunties, are converting their money into gold in a rush that has taken advantage of falling gold prices this year. Really they are buying gold after the inflation has happened and not before, but should still have the last laugh if China’s paper money collapses as it has so many times in the past.
But as with the subprime crisis in 2008 the final ‘black swan’ event is most likely to be a bank collapse or failure of a financial institution, like Lehman Brothers or Northern Rock. And it is impossible to predict with any certainty when that might happen.
However, there are rumours that some of the wealth management concerns are already bankrupt on paper. Half of their liabilities have to be refinanced every three months. Could there be a Chinese-style TARP rescue plan very soon? That looks inevitable but what will the damage be to financial markets in the meantime?