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. It could be a Lehman Brothers moment for Asia and, since much of that “hot money” has flowed into stocks, bonds and real estate in the United States, that would be very bad news for the U.S. as well. [Let me explain.]
So says Michael Snyder (theeconomiccollapseblog.com) in edited excerpts from his original article** entitled The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?
[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Snyder goes on to say in further edited excerpts:[First, some edited excerpts from an article by Gordon G. Chang as posted on Forbes.com under the title Mega Default In China Scheduled For January 31 as background on the potential for this mega default:]
“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 wealth management products (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.
Most analysts don’t worry about a WMP default. Their argument is that the People’s Bank of China, the central bank, is encouraging a failure of the Zhenfu product to teach investors to appreciate risk and such lesson will improve the allocation of credit nationwide. Furthermore, they reason the central authorities would never allow a default to threaten the system.
Observers make the logical argument that “to have a market meltdown, you have to have a market” and China does not have one. Instead, Beijing technocrats dictate outcomes. That’s correct, but that is also why China is now heading to catastrophic failure.
- Because Chinese leaders have the power to prevent corrections, they do so.
- Because they do so, the underlying imbalances become larger.
- Because the underlying imbalances become larger, the inevitable corrections are severe.
Downturns, which Beijing hates, are essential, allowing adjustments to be made while they are still relatively minor. The last year-on-year contraction in China’s gross domestic product, according to the official National Bureau of Statistics, occurred in 1976, the year Mao Zedong died.
Even if Beijing makes sure there is no default on January 31, we should not feel relief… There may have been 11 trillion yuan in WMPs at the end of 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. That appears to be in excess of credit expansion in 2012.
Even if credit expansion slowed last year, Silvercrest Asset Management’s Patrick Chovanec tells us why we should be concerned. “Looking purely at the decline in the year-on-year rate of credit expansion is kind of like arguing that if I chase my shot of vodka with a pint of beer, I’m actually exercising moderation because the alcohol proof level of my drinks is falling.”
Why will China’s next correction be historic in its severity? Because Chinese leaders will prevent adjustments until they no longer have the ability to do so. When they no longer have that ability, their system will simply fail. Then, there will be nothing they can do to prevent the free-fall. We are almost at that critical point – a WMP default could devastate the Chinese banking system and the larger economy as well…”
Private Debt Bubble In China Is Unlike Anything the World Has Ever Seen
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…
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.
The Answer (dated Jan. 29th) – Major shadow banking default dodged in China
Chinese investors avoided a high-profile trust default on Monday, easing worries that the economy may be about to tip the first domino of shadow banking defaults.
China Credit Trust reached a last-minute deal with investors to repay their investment in the 3 billion yuan (US$500 million) product, deflating concerns that a default would pound investor confidence in shadow banking and trigger a credit crunch.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://theeconomiccollapseblog.com/archives/the-23-trillion-credit-bubble-in-china-is-starting-to-collapse-global-financial-crisis-next (Copyright © 2014 The Economic Collapse)
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