Skip to comments.China Debt Bomb Ready to Explode
Posted on 10/30/2018 7:11:04 PM PDT by SeekAndFind
The great Chinese growth slowdown has been proceeding in stages for the past two years. The reason is simple. Much of Chinas growth (about 25% of the total) has consisted of wasted infrastructure investment in ghost cities and white elephant transportation infrastructure.
That investment was financed with debt that now cannot be repaid. This was fine for creating short-term jobs and providing business to cement, glass and steel vendors, but it was not a sustainable model since the infrastructure either was not used at all or did not generate sufficient revenue.
Chinas future success depends on high-value-added technology and increased consumption. But shifting to intellectual property and the consumer means slowing down on infrastructure, which will slow the economy.
In turn, that means exposing the bad debt for what it is, which risks a financial and liquidity crisis. China started to do this last year but quickly turned tail when the economy slowed. Now the economy has slowed so much that markets are collapsing.
But doesnt China have over $1 trillion of reserves to prop up its financial system?
On paper, thats true. But in reality, China is short U.S. dollars. The Chinese may have $1.4 trillion of U.S. Treasury securities in its reserve position, but they need those assets possibly to bail out their banking system or defend the yuan.
Meanwhile, the Chinese banking sector, which in many ways is an extension of the state, owes $318 billion in U.S. dollar-denominated deposits of commercial paper.
From a banks perspective, borrowing in dollars is going short dollars because you need dollar assets to back up those liabilities if the original lenders want their money back. For the most part, the banks dont have those assets because they converted the dollar to yuan to prop up local real estate Ponzis and local corporations.
Theres not much left over to bail out the corporate, individual and real estate sectors.
This is all part of a global dollar shortage attributable to Fed tightening, both in the forms of higher rates but also a reduction in base money.
A dollar shortage seems implausible in a world where the Fed printed $4.4 trillion. But while the Fed was printing, the world borrowed over $70 trillion (on top of prior loans), so the dollar shortage is real. The math is inescapable.
So the Chinese debt bomb that has been a long time in the making is finally getting ready to explode. The economy is slowing, debt is exploding and the trade war with Trump has hurt Chinas exports needed to earn dollars to pay the debts.
The defaults are beginning to pile up. Several large corporations and regional governments have defaulted recently.
Chinas leaders have panicked at the slowdown and have started the credit flow again with lower interest rates, higher bank leverage and more debt-financed, government-directed infrastructure spending.
Of course, this solution is strictly temporary. All it does is postpone the day of reckoning and make the debt crisis worse when it does arrive.
With every passing day, a Chinese financial collapse draws closer. The rest of the world will not escape the consequences.
When the crisis strikes in full force, possibly in 2019, the rest of the world will not be spared.
We’ve been propping up China ever since Tricky Dick Nixon started making deals with them. Hard to see how this can go on much longer.
Of course, Trump will get the blame if there’s giant crash.
Don’t wars start over stuff like this?
From what I understand (limited as it is), the Fed has to tighten upon money to unwind all of the leverage from supporting effectively negative interest rates for years of propping up O-bozo. Now that The Donald has real growth going, the Fed has their opening.
Meanwhile, I am guessing that the POTUS, unlike his Libtard foes who think he is stupid, understands that China has fiscal feet of clay.
We have lots of people who do nothing all day but think about money.
Very interesting; thanks for posting this article!
Traveling to Shenzhen about a decade ago, I was amazed to see literally hundreds of very tall cranes filling the horizon with building projects.
It was incredulous.
Was such unbridled construction tainted by ambitious government plans to house people in better earthquake-resistant living conditions?
Large scale government investments create enormous waste and abuse because they are not grounded in entrepreneurs who carry great risk on their backs.
Apparently China is a Black Swan catastrophe waiting to happen because builders and bankers don’t have adequate skin in the game.
I think this is what the author is talking about.
China collapsing will not hurt the US economy. We will survive without the paltry exports to the Communist country.
Chinas collapse will be boon to many other economies when they pick up the slack.
There are two Americans/Brits who travel China on motorcycles visiting these ghost cities...the recently completed buildings/malls are already crumbling do to poor materials and workmanship.
“Meanwhile, I am guessing that the POTUS, unlike his Libtard foes who think he is stupid, understands that China has fiscal feet of clay.”
Well said. I agree.
We catch that show once in a great while on VERY late Free Government TV. Always very, VERY interesting!
I wonder if they used any of that poisoned drywall like they sent here once.
So what are the consequences for us in the US?
Not to mention also the fact that thier one child policy for 40 years now means they have literally no replacement workers. They are screwed. Maybe some illegal immigrants could help. Lol.
China also just lost Brazil in the geo political scheme of things. Im not tired of WINNING.
Much of those ghost town buildings built just a few years ago, are crumbling and breaking down.
They were built very poorly and cheaply, and now they are literally falling apart
Yup, all the major ones.
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