Curious Capitalist

Is China About To Plunge Into Financial Crisis?

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Is China about to have its own Bear Stearns moment? I have been thinking a lot about this after reading a smart report released today by BofA Merrill Lynch Chinese economist Bin Gao, which looks at the recent debt restructuring at the China Credit Trust Co., a major Chinese financial institution. Just a few days ago, the Beijing based company was in danger of defaulting on a high risk, complex debt product. Then, suddenly, it managed to get its hands on enough money to restructure the half a billion-dollar deal and prevent the debt from going bad. Nobody knows who the investor was—the central government? a state owned bank? a worried Chinese billionaire? As if that wasn’t bad enough, the secret bailout comes at a time when intra-bank lending rates in China are rising (which means banks don’t trust each other), market volatility is increasing, and the value of risky debt products is plunging.

Sound familiar? That’s exactly what happened in the run up to the 2008 collapse of Bear Stearns in the U.S. Indeed, says Gao, “the bailout looks very much like the Bear Stearns moment.” The CCT problem isn’t the only red flag out there–over the last few months, there have been a number of investment projects that have gone bad in China, including debt issued by a coal mining company, and a provincial government real estate project. The risk of infrastructure projects going wrong and creating a domino effect of exploding debt, just as the subprime mortgage crisis did in the U.S., is something that TIME warned about over two years ago, in a cover story by Ken Miller entitled The China Bubble.

Are we at that moment now? Economic secrecy in China means it’s impossible to know for sure, but Ruchir Sharma’s column in the Financial Times today makes it clear that he thinks the Middle Kingdom is already in trouble. I’ve talked many times with Sharma, who heads up global macroeconomics for Morgan Stanley about the issues in China, and his metrics tell it best. The most reliable indicator of financial crisis is the pace of growth in debt (not the size, but the pace). Over the last five years, debt levels in China have increased by 71 percentage points. Looking back over the past 50 years, there are about 33 cases of countries with similar debt run-ups—22 of them plunged into a credit crisis, and all suffered a major economic slowdown. Needless to say, I’ll be watching this space very carefully.

26 comments
KenW
KenW

We the US will end up bailing China out.... China can't be what they are without the US, and we cannot be who we are without China.

beijaflor
beijaflor

Let look at the future of the world in terms of friendships and trade, not how many countries you can bomb. United States of America have few friends around the world, the entire Latin America hates you, even Canada is laughing at your pathetic government. Europe never liked you, and never will, just to go around France or Germany, and the honest answer is that you are dumb & stupid at best. And lets be honest, Asia would rather trade with China than you, even Japan and Australia, two of American's allies in Asia, are the biggest trading partner with China. Middle-East just wants to kill you in their best days, and most of Africa only trade with Asia and Europe. 


United States have no future in this world compares to China, no real friends, no real trading partners. Just like in the movie "It's a Wonderful Life", United States is like Mr. Potter, old and dysfunctional, with some assets and no friends. China is like George Bailey, when there are problems in life, China will still be the richest country in the world with friends abound to help out.


The TRUTH is, the only reason USA was in a financial crisis is not because of Wall Street, it is because in a globalized world, United States has no friends to help out.

duduong
duduong

China bears have been espousing this nonsense for at least two decades. They have been proven wrong 100% of the times.

If you somehow share this delusion, feel free to buy up puts on Chinese assets and enjoy your dream of a lottery jackpot while it lasts. The rest of us have to live our lives in reality.

zeustiak
zeustiak

China is going down, just a matter of when.  


It will be interesting to watch China play a shell game with failing companies and debt products as they attempt to keep everything under control.  


Each time they succeed the price of failure increases.  

Franchising
Franchising

Great article - tough questions - smart observations - I think you are seeing what many are seeing - cracks in the 3-Gorges Dam.

therickester
therickester

"China have increased by 71 percentage points. Looking back over the past 50 years, there are about 33 cases of countries with similar debt run-ups—22 of them plunged into a credit crisis, and all suffered a major economic slowdown."


The real question should be, out of those 33 cases which one pro-actively tried to slowdown its debt creation by doing what China is currently doing. The debt to GDP ratio is still relatively low compared to other nations, you have to keep that in perspective.

JoshYang
JoshYang

The report is seriously unbalanced, which solely presents not-so-well supported data and stats that serves the author's speculation. This kind of self-serving report happens routinely in the financial world. That's why you do your own analysis and draw your own judgement whenever it comes to make your financial decisions. Don't trust any self-claimed financial analyst, which is not a scientific profession.

georgesoros12
georgesoros12

Wow, I have noticed a lot of comments on western media sites and others, responding in an angry way to any negative comment about China.


It's almost as if they are part of the Chinese government itself, trying to prevent any negative feeling spreading through the western media.


Knowing the Chinese government, I can't help but think that's a possibility.

BajieZhu
BajieZhu

How does one realistically plunge into financial crisis with almost $4 Trillion in free foreign cash, unlimited ability to print the local currency, AND a 7.5% financial growth??


These assertions are verging on the absurd. 

RobertNguyen
RobertNguyen

In any big province, when you drive mile and mile passing empty high rise buildings - you know that the financial bubble is coming to China...

We all hope they can grow out of it - but with saber rattlings from their military, it's really hopeless.

Mark China down as a major problem this year...

DeNovo
DeNovo

I'm sorry but I must say it - you Americans are a sad case. This reminds me of the situation last year when Chinese president was about to visit the US and all media in the US were  "disturbed" by "Chinese cyber spying in the US" etc. etc... just a few days later Edward Snowden revealed US was/is spying even on children playing Angry Birds... US is in debt over its head, has totally disfunctional political process, corrupt monetary and financial system yet you guys are worried about China which has all those trilions in cash reserves... sad indeed...

choih548
choih548

You  seem  to  be driven by an irrational  anti-Chinese bias.  This  amateurish  article  is no different  from your  previous ones.  According to  the Economist magazine  which is written by the people  who have  far more balanced and  intelligent views on China than you do,  by and  large the  money  spent  by various Chinese local governments  for infrastructure  has been well spent, in spite of some  waste.  When it comes to  government waste, America  has done a far worse job than  China.  Just look at how much money has been wasted in the stupid Iraq  and Afghan wars.  According  to an  article I have read,  America  would  have been  a lot better off,  if the U.S government had taken over the Bear  sterns debts  thus preventing  the chain-reaction  of financial disasters  which  quickly  brought on  much  more  costly  Great Recession.   I think  the Chinese government studied and learned  some  valuable lessons from  the American  handling of the Bear Sterns case..  In  my opinion, the  Chinese government will let  some businesses  default  on a selective basis. The total  debt ( of governments, households, corporations) is  only  about 200% of it's GDP. The corresponding  figure  for  the U.S. is  about 330%.  The loan growth in China  has been coming down sharply starting in the second  half  of last year.  Unlike  the Western  commercial  banks, about  90%  of  all  Chinese commercial  banks  are  state-owned.  That means  they are  part of the  government.  So  there  is  absolutely no  way  the Chinese  government will let them default ( it  might  be different in 5-10 years when the  financial  reform firmly  takes place).  You  should  remember that  unlike  the  bankrupt American  government, Chinese  government has  a lot of financial  resources at hand  to  deal  with  any financial  emergencies.  It  basically  owns   all the  land in  China, has  about 3.8 trillion  dollars in it's  foreign exchange  reserves  and   the SOEs ( state-owns enterprises)  including the SOE banks, have made  $400-600 billion in profits  per year for  many years  and  also  almost  all  of the  Chinese debt  is domestically owed so that it doesn't  have to  worry  about  capital flight.  I have  a friendly  advice  for you. In  order  to  write more balanced  and intelligent articles on China,  get  off  your anti-Chinese agenda and interview such  well-respected economists  as Fan Fang, Stephen Roach, Robert Mundell  instead of quoting  perennial China  bears or bashers.

Titanus
Titanus

Okay so if this happens what affect will it have on the US?  Any econ gurus want to weigh in?  Tx

umpteenth.caesar5
umpteenth.caesar5

@beijaflor  China doesn't really have many friends either. Look at what China has been doing in the "South China Sea" in the last few years, picking fights with Japan, the Philippines, Vietnam and maybe a few others over a bunch of islands with precious resources, claiming it "owns" them. That definitely isn't a way to make friends. China is also frequently the target of criticism for human rights abuses. It doesn't seem like friendship to me. I think that makes China and the USA pretty much even.

grayishy
grayishy

@duduong  I don't know about that. George Soros (the real George Soros) said it was going to happen. Unfortunately, he knows.

PulSamsaraXi
PulSamsaraXi

@georgesoros12   You've noticed too ?  


We've been infiltrated - in a big way lately.


In the interest of objectivity I really wish the forum coders would begin coding in regional proximity tags.  It wouldn't be that difficult to shine some sunlight on where these posts originate.  More truth the better.


It's getting ridiculous otherwise.


(full disclosure) I'm posting from the northern part of the US - Central Time zone.

Macro.Polo
Macro.Polo

@BajieZhu Errr... Free foreign cash? Those foreign reserves are bought with CNY liabilities - no different to when the Fed issues reserves to buy US bonds. Actually the PBoC issues some longer term debt to buy US bonds as well, so it's a little different.


Either way, the PBoC doesn't have unencumbered assets, it has debt/liability financed asset purchases. Make of that what you will.

shuami
shuami

@RobertNguyen: Well, "Gordon" Nguyen: can I mark your words down and come back to you by the end of the year??

Funny you would want to bring military into this--you do know as a matter of fact that industrial-military complex was actually what has kept the America afloat for a good part of its history, do you?

grayishy
grayishy

@DeNovo  All those trillions in cash reserves? What? You must be getting your information from dreams or something.

umpteenth.caesar5
umpteenth.caesar5

@choih548  People will have their theories and make their predictions about China. We've heard plenty of "good news" about China. I think some people just want to hear bad news. It's not really "bias." I think it's just boredom. People are just bored with the idea that "China isn't going to fall," so they're thinking hey, let's have some bad news!!!!


Most the signs indicate that China is unlikely to suffer a financial crisis any time soon, at least not in the next 12 months. I reckon it'd have to be close to a recession before that happens. Months before the collapse of Lehman Brothers, there were questions as to whether the USA was undergoing a recession. China isn't even close to that. It's still growing. I don't think these things happen that quickly.

es12777
es12777

@choih548 Wow! If there is anyone that sounds bias here is you, my friend. I've heard a lot of people like you for decades in Wall Street.

choih548
choih548

@es12777@choih548  If  you want to  discuss  intelligently, then state your positions backed by  solid knowledge,  otherwise  shut the h--l up.

grayishy
grayishy

@choih548 @es12777  There is no such thing as solid knowledge in world politics and finance. That's your biggest issue: You really believe you have "solid knowledge." Surprise.