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China Is Crashing … As Predicted

George Washington's picture




 

The head of China’s sovereign wealth fund noted in 2009: “both China and America are addressing bubbles by creating more bubbles”.

He’s right …

Global credit excess is worse than before the 2008 crash.

The U.S. and Japan have been easing like crazy, but – as Zero Hedge notes  [if you missed it when Tyler Durden first posted this] – China has been much worse:

 Here is just the change in the past five years:

You read that right: in the past five years the total assets on US bank books have risen by a paltry $2.1 trillion while over the same period, Chinese bank assets have exploded by an unprecedented $15.4 trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion – some two and a half times the GDP of China!

 

Putting the rate of change in perspective, while the Fed was actively pumping $85 billion per month into US banks for a total of $1 trillion each year, in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!

 

Here is how Diapason’s Sean Corrigan observed this epic imbalance in liquidity creation:

Total Chinese banking assets currently stand at some CNY147 trillion, around 2 ½ times GDP. As such, they have doubled in the past four years of increasingly misplaced investment and frantic real estate speculation, adding the equivalent of 140% of average GDP – or, in dollars, $12.5 trillion – to the books. For comparison, over the same period, US banks have added just less than $700 billion, 4.4% of average GDP, 18 times less than their Chinese counterparts – and this in a period when the predominant trend has been for the latter to do whatever it takes to keep commitments off their balance sheets and lurking in the ‘shadows’!

Indeed, the increase in Chinese bank assets during that breakneck quadrennium is equal to no less than seven-eighths of the total outstanding assets of all FDIC-insured institutions! It also compares to 30% of Eurozone bank assets.

Truly epic flow numbers, and just as unsustainable in the longer-run.

And here:

So what’s the problem?

Well, the world’s most prestigious financial agency – the central banks’ central bank, called the Bank of International Settlements or “BIS”  –  has long criticized the Fed and other central banks for blowing bubbles.  The World Bank and top economists agree.  So do many others.

As such, it was easy for us to predict a crash in China when the bubble collapses.

We argued in 2009 that China’s period of easy credit was analogous to America’s monetary easing starting in 2001 … and Rome’s in 11 B.C.

We noted in 2009 and against in 2011 that China is suffering from a lot of the same malaises as the American economy, including corruption, crony capitalism, and failure to disclose bad debt.

In 2010, we asked “When Will China’s Bubble Burst?

China’s $23 Trillion Dollar Credit Bubble Is Bursting

International Business Times noted last year that China’s debt-laden steel industry was on the verge of bankruptcy.

Quartz reported in December that a huge coal company called Liansheng Resources Group declared bankruptcy with 30 billion yuan ($5 billion) in debt.

Chinese Business Wisdom argues (via China Gaze) that waves of bankruptcies are striking in 10 Chinese industries: (1) shipbuilding; (2) iron and steel: (3) LED lighting; (4) furniture; (5) real estate development; (6) cargo shipping; (7) trust and financial institutions; (8) financial management; (9) private equity; and (10) group buying.

AP notes today:

Chinese authorities have allowed the country’s first corporate bond default, inflicting losses on small investors in a painful step toward making its financial system more market-oriented.

 

A Shanghai manufacturer of solar panels paid only part of 90 million yuan ($15 million) in interest [it owed] …

 

Until now, Beijing has bailed out troubled companies to preserve confidence in its credit markets. But the ruling Communist Party has pledged to make the economy more productive by allowing market forces a bigger role.

Time asks whether China has reached its “Bear Stearns moment”:

A dangerous build-up of debt and an explosion of risky and poorly regulated shadow banking have raised serious concerns about the health of China’s economy. That’s why the Chaori default — the first ever in China’s domestic corporate bond market — has sparked fears that the country could be headed for a full-blown economic crisis like the one that slammed Wall Street in 2008. “We believe that the market will have reached the Bear Stearns stage,” warned strategist David Cui and his team at Bank of America-Merrill Lynch in a report to investors.

 

The concern of Cui and others is that the Chaori default will be the tip-off point for an unravelling of China’s financial system. The default could wake investors and bankers to the realization that companies they thought were safe bets are potentially not, and they could begin to reassess other loans and investments to other corporations. In other words, they might start redefining what is and is not risky. That could then lead to a credit crunch, when nervous bankers become wary of lending money, or lending at affordable interest rates. More bankruptcies could result. That eventually causes the financial markets to lock up — and we end up transitioning from a Bear Stearns moment to a Lehman Brothers moment, when the financial sector melts down. “We think the chain reaction will probably start,” Cui wrote. “In the U.S., it took about a year to reach the Lehman stage when the market panicked … We assess that it may take less time in China.”

The Financial Post reported in January:

The U.S. and Europe learned the hard way about the dangers of shadow banks in the financial crisis but, five years later, China appears set to get its own painful lesson about what can happen when large capital flows get diverted to unregulated corners of the financial system.

 

***

 

“We estimate that 88% of the revenues of Chinese trust companies is at risk in the long term,” said McKinsey and Ping An.

 

***

Billionaire investor George Soros recently wrote on a popular news website that the impending default and the growing fear reflected in Chinese markets has “eerie resemblances” to the global crisis of 2008.

The big picture:  the $23 trillion dollar Chinese credit bubble is starting to collapse.

As Michael Snyder wrote in January:

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.  Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion.  That is an increase of $14 trillion in just a little bit more than 5 years.  Much of that “hot money” has flowed into stocks, bonds and real estate in the United States.  So what do you think is going to happen when that bubble collapses?

 

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.  [Note: Private debt is much more dangerous than public debt.] 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.  In fact, it is being 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.

 

***

 

As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…

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,” she said.

 

The ratio of credit to GDP has jumped by 75 percentage points to 200pc 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.

 

***

 

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…

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.

Overall, M2 in China is up by about 1000 percent since 1999.  That is absolutely insane.

 

***

 

But I am not the only one talking about it.

 

In fact, the World Economic Forum is warning about the exact same thing…

Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.

***

 

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.

 

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Sun, 03/09/2014 - 08:29 | 4527232 MythicalFish
MythicalFish's picture

Big Bubble Brutally Bursts ... Bringing Bankruptcies, Bond Busts

 

Political Pundit Predicts Panic Prematurely, Peddles Platitudes.

Sun, 03/09/2014 - 06:35 | 4527174 AlbertthePudding
AlbertthePudding's picture

Isn't China a Goldman Sachs project? Wasn't Japan a Chase/JP Morgan Chase project?

Sun, 03/09/2014 - 01:53 | 4527017 El Gordo
El Gordo's picture

So, knowing what we know, how do we capitalize on this information and make a bunch of money?  Sometimes just planning for survival is not enough - let's get rich in the process too.

Sun, 03/09/2014 - 04:11 | 4527107 SAT 800
SAT 800's picture

Well first you have to know what not to do. So you need to be out of the stock market; OUT; and they doesn't mean cut down; as in I cut down to a pack a day. it means NADA. After that it gets to be a field of study; all I can tell you is don't be a trend follower; pick tops and bottoms and counter punch. start studying the futures markets; there's big opportunities there every year.

Sat, 03/08/2014 - 21:57 | 4526594 wildfry
wildfry's picture

This onslaught of news on China's debt is suspicious. With Total Debt at 220% of GDP, and the US and Japan at 348% and 500%+ respectively it is strange to focus on China. On top of that interest rates on shadow bank loans are 23% to 30%, so plenty of room for refinancing. In Japan half the debt is at sub 1% interest. Where do you go from there?

Sat, 03/08/2014 - 19:55 | 4526152 whidbey-2
whidbey-2's picture

China governments choices (central planned & public financed  v. private planning & blended financing) must be understood.  This is the interregnum between the two possible economic futures of China. It will not be easy,   but it suggests that China may have to infranchise its population as voters, consumers, and equals .  It is that or a dissolution of the Pacific Asia trade zone. No half ways or it blows up in several years.

Sat, 03/08/2014 - 18:32 | 4525853 Herdee
Herdee's picture

Still holding and still building a gold bullion position along with silver as well.I have a good safe bolted to the basement floor by professionals.I also learned from mormons (although I'm not of that religion myself) some interesting techniques to canning vegetables and food dehydration methods.I bought a couple of good food dehydrators and I'm filling up the basement storage racks with food and essentials that keep well.Many people forget about the generator,toilet paper supply,dry sand toilet,firewood for the newly installed wood stove,a good bicycle,outside water storage etc., so you need to plan carefully.My grandparents came from the farm and always had food and equipment stored.They didn't throw things out and they looked after what they had.Other than that I hold Sprott Funds in Canada.A stock with the TSX symbol CEF,various gold mining shares along with SanGold ( SGR-T).Just added a couple of big jars of junk silver into the above mix too.And if that's not enough,while your not trading or working at your job,you can get started on the greenhouse.Even if you don't have much money,you can still go on the web and learn to build one very cheap with materials that a lot of home contractors just throw out.Start the hobby a couple of hours each and every day while having a puff on your cannabis sativa.

Sat, 03/08/2014 - 17:45 | 4525699 Greg
Greg's picture

In a word: TIMBERRRRR.....

Sat, 03/08/2014 - 16:19 | 4525487 moneybots
moneybots's picture

Math: The bigger the boom, the bigger the bust.

Sat, 03/08/2014 - 15:00 | 4525368 Sufiy
Sufiy's picture


Koos Jansen: China’s Road To Secret Gold Accumulation

 Koos Jansen research provides more confirmation of the state-level military plan implemented by China in order to accumulate Gold under the radar screen of the market observers. Explosive situation around Ukraine will ignite further catalyst for De-Dollarisation and China and Russia maybe already much better prepared for it than a lot of Western policy makers really understand. The Financial War could have been already won long time ago. We are due for a lot of surprises in the Gold and Currency markets coming out in the next few weeks.

 

http://sufiy.blogspot.co.uk/2014/03/koos-jansen-chinas-road-to-secret-go...

Sat, 03/08/2014 - 15:46 | 4525446 Rafferty
Rafferty's picture

Most of the money is owed to state-owned banks.  Why can't Chine (BOC) just rev up the printer a la the Fed?  

Sat, 03/08/2014 - 18:18 | 4525815 walküre
walküre's picture

They have been doing that but not all they're printing is ever reported or accounted for. Shadow banking created so much liquidity that Chinese were able to buy up real estate in the West, and entire factories and IP. The money is all bogus but the difference to the US or Europe is that Mao's sons actually disbursed all that liquidty to a select group who in turn purchased hard assets. The Fed and ECB only gave the money to the banks to play with and it created biggest banker bonuses which were all recorded and publicized. The banks didn't have a grand plan unlike the Chinese. We're talking communist takeover on a global scale.

Sat, 03/08/2014 - 14:51 | 4525343 Carl Popper
Carl Popper's picture

Lol. A couple of years ago on zerohedge the consensus was that china would take over the world with their centrally planned economy.

A few "trolls" noted that china was more leveraged, more corrupt, more mismanaged, and had greater capital misallocations than anyone else in the world. Also they have as bad a demographic problem as europe. They are just a decade or two behind.

China will japanify faster than japan, IF China is very very lucky.

I expect far worse. More like what happened to the USSR. That is the fear of the chinese communist party too.

Sat, 03/08/2014 - 14:29 | 4525292 tony bonn
tony bonn's picture

while the chinese economy is as much a fraud as the american, there is one distinct difference - the chinese have been trading their toilet paper for gold. however much the bubble bursts, china will end up relatively better off....the imports of chinese gold have been monumental, and enormously greater than official numbers report.....london, comex, and switzerland are completely bereft of gold and many of its wealthy customers don't even know yet that they have been robbed in broad daylight...

the us junk asset purchasses have been 2-3 times what the liars at the fed report....the fed is monetizing at least 200 billion per month of crappy assets......

Sat, 03/08/2014 - 13:24 | 4525126 Johnny Cocknballs
Johnny Cocknballs's picture

global fiat is collapsing all at once.

but China has manufacturing, trade surpluses, an expanding tech sector {which should come along nicely in the next 10 years} and savings.

 

What has the US got, again?

Sun, 03/09/2014 - 12:35 | 4527680 ltsgt1
ltsgt1's picture

"Global fiat is collapsing all at once."

I infer that is why the Chinese is out printing the dollar and yen. Maybe they know the RMB will not be able to survive a global fiat collapse no matter how responsible they are with their currency. So they figure, if you can't beat them - join them, they would out print the US and Japan and buy as much hard assets as possible before the collapse.

Sun, 03/09/2014 - 11:17 | 4527503 moonstears
moonstears's picture

"China...expanding tech sector"...Thank Hillary, and don't forget to cast your vote in 2016.

Sat, 03/08/2014 - 14:27 | 4525288 sgt_doom
sgt_doom's picture

What has the US got, again?

That special twerking of Miley Cyrus?

Sat, 03/08/2014 - 13:12 | 4525098 novictim
novictim's picture

Hey! Does it matter? If the bubbles burst...but no one (except those who are ignored) is aware of it, and business-as-usual prevails, then no, it does not matter. If a Tree falls in the Forest and no one hears it fall...does it make a sound?  I'm thinking "no".

Sat, 03/08/2014 - 12:19 | 4524994 boeing747
boeing747's picture

Talking about Prediction, I have Oct 3, 2005 Time Magazine, on page 78:

 

"5 SWEET HOME SHOWS":

1. The Adam Carolla Project, TLC.

2. Flip That House, DISCOVERY HOME.

3. Small Space, Big Style, HGTV.

4. This Old House, PBS.

5. Dwell, Fine Living.

So Time Magazine is more reliable bubble indicator than cnbc.

Yes, 'overconfident' chicken never thought financial wolves will attack.

Sat, 03/08/2014 - 12:04 | 4524960 elwind45
elwind45's picture

This is like when big Paul got serious

Sat, 03/08/2014 - 11:40 | 4524906 elwind45
elwind45's picture

The Soros point is the huge takeaway if you believe 500 billion was withdrawn from American moneymarkets and by him as per the legend of the breaking of the moneymarkets. I remember the weekend of the short cover on AIG AND WATCHING THE MONEY COMING OUT? Sky rockets in flight afternoon delight

Sat, 03/08/2014 - 08:35 | 4524618 Mediocritas
Mediocritas's picture

Off topic, but here's something for you GW (if not already seen): http://motherboard.vice.com/read/the-internet-of-cops-is-coming

Sat, 03/08/2014 - 10:02 | 4524702 rsnoble
rsnoble's picture

Heh that's a cool tech site I haven't seen thanks.

Sat, 03/08/2014 - 07:30 | 4524569 Hephaestus
Hephaestus's picture

Takes a lot of work to keep the currency crushed and living standards low in China. Its the people they are just so damned productive.

Sat, 03/08/2014 - 06:32 | 4524526 Drifter
Drifter's picture

"Bank assets" is meaningless outside of ZH. 

China is the #1 economic powerhouse on the planet and will have the next world reserve currency.

Sat, 03/08/2014 - 13:23 | 4525118 Poofter Priest
Poofter Priest's picture

 

The world reserve currency is going to be an SDR of sorts.

This is what the CBs want.

And also digital money for the masses.

Its how they roll.

Sat, 03/08/2014 - 18:24 | 4525812 Mediocritas
Mediocritas's picture

When the US economy decays enough then yeah, that's the plan. It was intended that way originally, except the US scuttled it and could get away with it due to the relative strength of the US economy at that time and the power it could command within the IMF.

Under the SDR system, nations cede sovereignty to the IMF as the IMF decides currency weightings within the SDR basket. Seeing as OECD nations have since moved to floating currencies then I'm not sure how this would work out (it would be a messy transition).

The purpose of floating currencies is to preserve foreign currency reserves in the face of a current account deficit, without having to limit domestic credit extension. In other words, floating currencies are a bankster protection mechanism that sacrifice real economies as burnt offerings when what really should happen in response to a current account deficit is that domestic lending be constrained.

Banksters try to hide the fact that easy credit fuels a current account deficit. People don't seem to get this, which is why they scratch their heads at Japan's growing deficit. They've bought into the myth - presented in every economics textbook - that devaluing a currency (via low rates fuelling credit extension) boosts exports (net).

Long story short. For the SDR to ever become the dominant currency, nations must be prepared to sacrifice control of monetary policy, and banks must be prepared to sacrifice control of lending.

Ie, a snowball's chance in hell.

Sat, 03/08/2014 - 14:30 | 4525295 sgt_doom
sgt_doom's picture

Indeed, Poofter Priest, you appear to be correct, especially since the Bretton Woods Committee, the lobbyist group for the international super-rich, which only communicates with the US Senate Majority Leader and the House Speaker, has been pushing that way.  (brettonwoods.org)

Sat, 03/08/2014 - 10:08 | 4524709 Raging Debate
Raging Debate's picture

Drifter - I see the United States and China at about parody in terms of real GDP. The world is a better place with two good economic engines vs. one, but trade rebalancing and a period of detente should have began around 2005. Part of the collapse in exports is trade rebalancing occuring now. They have overcapacity of manufacturing production so even if 3 of 10 businesses fail, the others can easily pick up the work. I also see more regional retailers competing nicely against Wal-Mart with similar pricing but better quality goods.

China may indeed become the new reserve currency but as I have mentioned here a few times, first they have to have a depression. God help those people. The bigger the bubble the bigger the crash and this one is going to a doozy. It is going to be miserable over there (worse than our nasty stagflation) for a few years and they do not have the same social safety nets we do. Top Chinese leadership saying they will let market forces reorganize the economy going forward is a good thing, but the culture is used to command economy, they will face challenges and this will delay a recovery.

Sat, 03/08/2014 - 17:49 | 4525713 JuicedGamma
JuicedGamma's picture

Yes it's a parody, I'm sorry but I couldn't read the rest of your post.

Sat, 03/08/2014 - 10:08 | 4524708 Raging Debate
Raging Debate's picture

DUPE -

PS - Anybody know the technical reason for the duping and how to avoid it?

Sat, 03/08/2014 - 16:19 | 4525486 The Wisp
The Wisp's picture

you get lag, you hit send, it lags you click again both posts register..

Sat, 03/08/2014 - 12:39 | 4525027 TPTB_r_TBTF
TPTB_r_TBTF's picture

.

Sat, 03/08/2014 - 05:11 | 4524488 gann1212
gann1212's picture

it wont be the next few year. it will be the next few weeks. fasten your seat belts and enjoy the ride. all of a sudden we are going to find out that stocks can also go down and not just up. and that will be a surprise to many especially those with a lot of margin debt

Sat, 03/08/2014 - 04:21 | 4524462 q99x2
q99x2's picture

Ya and can you believe they let the Chinese buy US and EU assets with printed fiat currency?

Crazy.

Sat, 03/08/2014 - 12:49 | 4525043 oddjob
oddjob's picture

Can you believe people trade the majority of their only life in return for worthless paper script issued by a private bank overseen by fanatical religious wingnuts?

Sat, 03/08/2014 - 14:53 | 4525346 shovelhead
shovelhead's picture

Why not? As long as it gets em a haircut and a blowjob.

The real problems start when the paper won't get them anything.

Sat, 03/08/2014 - 03:42 | 4524436 ebworthen
ebworthen's picture

No shortage of compliant deluded U.S. Sheeple to throw their savings, IRA/401K, and Pension funds into the black hole of the bankster Ponzi.

Sat, 03/08/2014 - 09:58 | 4524697 DerdyBulls
DerdyBulls's picture

They don't have anything to work with anyway. Where would they put it if they did? A mattress? How bout single family rentals? Oh, wait a sec, quasi rent controls are here or coming with the foreclosure inquisition by private equity.

Tue, 03/11/2014 - 01:48 | 4524401 GoldIsMoney
GoldIsMoney's picture

It's devastating to see ones comments fullfilled up to the point. It's clear why we don't get rid from the central banks. It's way to practical for expropriation....

Sat, 03/08/2014 - 00:23 | 4524179 Kina
Kina's picture

And of course China needs a distraction -- look over there at Russia and USA.. . we should help out

Sat, 03/08/2014 - 00:21 | 4524178 Ban KKiller
Ban KKiller's picture

Ahh...yes, timing. I vote daytime. Say two thirty, the defecation hits the rotary oscillator and success flies out worldwide?

Sat, 03/08/2014 - 00:18 | 4524175 Kina
Kina's picture

If I were a Chinese person I would want to hold some gold -,-- oh wait. 

!!

Fri, 03/07/2014 - 23:59 | 4524133 besnook
besnook's picture

much of the money is owed to the pboc so it doesn't matter. the debt in the shadow system will soon be owned by the pboc so it doesn't matter. in other words, it doesn't matter.

the chinese have figured out the real magic of fiat. it doesn't matter how much debt is printed as long as it is owed to yourself. gee, i owe myself 10 billion dollars. who really cares?

meanwhile, the usa is being strangled by a private bank. the usa will go bankrupt long before the chinese will.

Sat, 03/08/2014 - 19:39 | 4526090 algol_dog
algol_dog's picture

The only intelligent, meaningful thing written on this forum. That's why this can go forever. 

Sun, 03/09/2014 - 14:40 | 4528025 Mountainview
Mountainview's picture

Yes, you have to look at both sides of the banking balance sheet. The problem will be contained to China and the PBOC. There are no US;Europeanor Japanese deposit holders in Chinese banks.

Fri, 03/07/2014 - 23:36 | 4524063 swmnguy
swmnguy's picture

"A Shanghai manufacturer of solar panels paid only part of 90 million yuan ($15 million) in interest [it owed] …"

No wonder we haven't seen much of Leo Kolivakis around here for a while.

 

Fri, 03/07/2014 - 23:18 | 4524015 stant
stant's picture

private equity might be looking for a pin i am reading .

Fri, 03/07/2014 - 23:07 | 4523984 snodgrass
snodgrass's picture

Next up, Chinacare.

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