Will China's Credit Bubble Cause A Global Financial Meltdown?
http://www.prophecynewswatch.com/2014/January24/244.html
Financial institutions the world over are sounding the alarm of the possibility of a massive default in China, come January 31, 2014. If this should happen, it could lead to a cascading collapse of China’s entire banking system, which could potentially result in "sky-high interest rates" and "a precipitous plunge in credit".
In other words, it could be a "Lehman Brothers moment" for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Lehman collapsed in 2008, and since then, the level of private domestic credit in China has risen to a staggering $23 Trillion dollars (up from $9 Trillion), an increase of $14 trillion in five short years. Much of that has flowed into stocks, bonds and real estate in the United States. What do you think will happen when that bubble collapses?
The bubble currently developing 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 so short period of time. All this debt has helped fuel tremendous economic growth in China, but now a number of Chinese investment houses are beginning to understand just how overextended they are.
It is projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014.
Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for expanding their respective money supplies, but the reality is that China has surpassed all of their efforts combined. As the Telegraph pointed: ”Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. They have replicated the entire U.S. commercial banking system in five years."
The ratio of credit to GDP has jumped by 75 percentage points to 200 percent of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," she said.
As with all other things in the financial world, what goes up must eventually come down, and right now January 31st is shaping up to be a particularly important day for the Chinese financial system. The following is from a Reuters article:
“The trust firm responsible for a troubled high-yield investment product sold through China's largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million) product matures on Jan. 31, state media reported on Friday.”
“Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.”
“If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly. A recent Forbes article explained why this is the case...”
A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and have ripple effects that impact the larger economy as well. In short, 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 the 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.
The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China. According to Forbes, M2 in China increased by 13.6 percent last year.
In the end, none of these details matter. The reality 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 when. Will you be prepared when it does?
(H/T: Economic Collapse Blog)
Read more at http://www.prophecynewswatch.com/2014/January24/244.html#7F35DKXA4Ur6VzhB.99
http://www.prophecynewswatch.com/2014/January24/244.html
Financial institutions the world over are sounding the alarm of the possibility of a massive default in China, come January 31, 2014. If this should happen, it could lead to a cascading collapse of China’s entire banking system, which could potentially result in "sky-high interest rates" and "a precipitous plunge in credit".
In other words, it could be a "Lehman Brothers moment" for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Lehman collapsed in 2008, and since then, the level of private domestic credit in China has risen to a staggering $23 Trillion dollars (up from $9 Trillion), an increase of $14 trillion in five short years. Much of that has flowed into stocks, bonds and real estate in the United States. What do you think will happen when that bubble collapses?
The bubble currently developing 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 so short period of time. All this debt has helped fuel tremendous economic growth in China, but now a number of Chinese investment houses are beginning to understand just how overextended they are.
It is projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014.
Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for expanding their respective money supplies, but the reality is that China has surpassed all of their efforts combined. As the Telegraph pointed: ”Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. They have replicated the entire U.S. commercial banking system in five years."
The ratio of credit to GDP has jumped by 75 percentage points to 200 percent of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," she said.
As with all other things in the financial world, what goes up must eventually come down, and right now January 31st is shaping up to be a particularly important day for the Chinese financial system. The following is from a Reuters article:
“The trust firm responsible for a troubled high-yield investment product sold through China's largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million) product matures on Jan. 31, state media reported on Friday.”
“Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.”
“If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly. A recent Forbes article explained why this is the case...”
A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and have ripple effects that impact the larger economy as well. In short, 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 the 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.
The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China. According to Forbes, M2 in China increased by 13.6 percent last year.
In the end, none of these details matter. The reality 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 when. Will you be prepared when it does?
(H/T: Economic Collapse Blog)
Read more at http://www.prophecynewswatch.com/2014/January24/244.html#7F35DKXA4Ur6VzhB.99
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