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Related: About this forumThe coming debt bust
(The Economist) CHINA was right to turn on the credit taps to prop up growth after the global financial crisis. It was wrong not to turn them off again. The countrys debt has increased just as quickly over the past two years as in the two years after the 2008 crunch. Its debt-to-GDP ratio has soared from 150% to nearly 260% over a decade, the kind of surge that is usually followed by a financial bust or an abrupt slowdown.
China will not be an exception to that rule. Problem loans have doubled in two years and, officially, are already 5.5% of banks total lending. The reality is grimmer. Roughly two-fifths of new debt is swallowed by interest on existing loans; in 2014, 16% of the 1,000 biggest Chinese firms owed more in interest than they earned before tax. China requires more and more credit to generate less and less growth: it now takes nearly four yuan of new borrowing to generate one yuan of additional GDP, up from just over one yuan of credit before the financial crisis. With the governments connivance, debt levels can probably keep climbing for a while, perhaps even for a few more years. But not for ever.
When the debt cycle turns, both asset prices and the real economy will be in for a shock. That wont be fun for anyone. It is true that China has been fastidious in capping its external liabilities (it is a net creditor). Its dangers are home-made. But the damage from a big Chinese credit blow-up would still be immense. China is the worlds second-biggest economy; its banking sector is the biggest, with assets equivalent to 40% of global GDP. Its stockmarkets, even after last years crash, are together worth $6 trillion, second only to Americas. And its bond market, at $7.5 trillion, is the worlds third-biggest and growing fast. A mere 2% devaluation of the yuan last summer sent global stockmarkets crashing; a bigger bust would do far worse. A mild economic slowdown caused trouble for commodity exporters around the world; a hard landing would be painful for all those who benefit from Chinese demand.
Brace, brace
Optimists have drawn comfort from two ideas. First, over three-plus decades of reform, Chinas officials have consistently shown that once they identified problems, they had the will and skill to fix them. Second, control of the financial systemthe state owns the major banks and most of their biggest debtorsgave them time to clean things up.
Both these sources of comfort are fading away. This is a government not so much guiding events as struggling to keep up with them. In the past year alone, China has spent nearly $200 billion to prop up the stockmarket; $65 billion of bank loans have gone bad; financial frauds have cost investors at least $20 billion; and $600 billion of capital has left the country. To help pump up growth, officials have inflated a property bubble. Debt is still expanding twice as fast as the economy. ..............(more)
http://www.economist.com/news/leaders/21698240-it-question-when-not-if-real-trouble-will-hit-china-coming-debt-bust
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The coming debt bust (Original Post)
marmar
May 2016
OP
oldandhappy
(6,719 posts)1. Thank you
CanonRay
(14,149 posts)2. Thanks for posting this
it keeps me out of GD: Primaries