Guest Post: The $23 Trillion Credit Bubble In China Is Starting To Collapse – What Next?

Tyler Durden's picture

Submitted by Michael Snyder of The Economic Collapse blog,

Did you know that financial institutions all over the world are warning that we could see a "mega default" on a very prominent high-yield investment product in China on January 31st?  We are being told that this could lead to a cascading collapse of the shadow banking system in China 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.  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.  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.

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 creating too much money.  But the truth is that what has been happening in China surpasses all of their efforts combined.  You can see an incredible chart which graphically illustrates this point right here.  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.

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 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...

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.

And of course China is not the only place in the world where financial trouble signs are erupting.  Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered " a surprise fourth-quarter loss"...

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.


Germany's biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.

If current trends continue, many other big banks will soon be experiencing a "bond headache" as well.  At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years.  Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the "nightmare scenario" that I keep talking about.

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.


Ahead of next week's WEF annual meeting in Davos, Switzerland, the forum's annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.


This would create a "vicious cycle" of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

So will a default event in China on January 31st be the next "Lehman Brothers moment" or will it be something else?

In the end, it doesn't really matter.  The truth 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 time.

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rsnoble's picture

The suspense is killing me.  And everyone else. Literally.

PacOps's picture

I can be content with a year or so more to keep stacking.

DoChenRollingBearing's picture

Yeah, I hear you.  More time means more accumulating.

Debt is a killer!  Avoid.

johngaltfla's picture

The good news is the NSA is spying on their citizens too and can flag the guilty culprits for immediate execution for this massive economic implosion.

The bad news the real guilty parties are at the .gov, GSJPMCBACWFCetc, and the Fed and they have all the drones and hellfire missiles.

Vampyroteuthis infernalis's picture

When things like this go down in hellholes like China, someone pissed off the politburo. My guess is this was coming for months. Finally, the whipping boy was found.

N2OJoe's picture

Nonsense, It's all the fault of those racists preppers and stackers!

Sincerely, Eric Holder.

frankTHE COIN's picture

Let me consult my Fortune Cookie.

XenoFrog's picture

It's like watching a really predictable horror movie that never ends.

prains's picture

...this however has a slight porn element to it that adds to the intrigue

Carpenter1's picture

If we can see it coming, its not the big one.

Obchelli's picture

Whatch for Market rally like crazy on Feb 1 with headlines how China avoided collapse. It's same as actualy problems in Greece contributed to at least 2000 dow up points ano headlines every other day how Greece (was/is/will) be saved which where appearing every other day

Gnonannon's picture

It's literally as if literally doesn't mean literally anymore.

DaddyO's picture

So What!

The CB's will pick up the slack and transfer the risk somewhere else...

The backs of the workers in the case of China looks promising.


CrashisOptimistic's picture

Why do you guys continue to get this wrong?

Nothing is going to happen.  If the Chinese society is threatened by this, the debt will be declared non existent, and no that won't be a default event.  The debt holders will be ordered to forget it, and they'll be made whole with some new money.

MONEY IS ILLUSORY.  It has no value.  Gold is no different.  It can all be changed by decree.

The only things that are real are food calories and oil joules that carry food calories to shelves.  The rest is hand waving bullshit.

CheapBastard's picture

Those loans [aka, debt] has already been secreted out of the country into RE all over the world I suspect from reading China Daily and other news reports a bout the amount flooding out of that country by the super wealthy. Even Yahoo had an article about this a few days ago saying over 1/3 of China's people with wealth over $16 million have already moved it out to Canada, Australia, USA, etc.

Good luck getting it back.

Oxbo Rene's picture

This is so true .....
I get all caught up in reading about all this coming
gloom and doom, then, your post just brings me back to reality. = Only thing of importance in this world is your health, everything else is just "stuff' ...

ReactionToClosedMinds's picture

.... until the 'system' (here financial system .....which is all the politicians & 'leaders' care about) freezes up ......then it is all about who to blame.  In that instance , 'health' is secondary as you have a 'survivla' (or survive in current form) issue on your hands

CSA's picture

The only thing that matters in this world is what happens after this world.

El Vaquero's picture

They can declare whatever they want.  If it hurts their ability to import oil due to other nations looking at their willingness to honor their deals skeptically, it becomes more than just bullshit.  The US is in the same boat.  We are dependant on the rest of the world for a huge chunk of our oil. 

angel_of_joy's picture

That's why they grab pretty much every ounce of gold they could get their hands on.

Unlike Americans, their government knows that their fiat curency is crap.

Besides, they know how to manufacture stuff... quite useful when you try findind something to sell in exchange for oil.

Tulpa's picture

All they know how to manufacture is cheap plastic shit (eg iCrap) and pirated DVDs.  The quality of their so-called "durable" goods is shoddy as hell.

Buick, the armpit of GM, is the #1 car brand in the PRC.  That should be suspicious for those hailing PRC as a manufacturing leader.

CSA's picture

A little bit from investors from China and other countries.  Some of it pretends to be banks (which won't fail), some of it pretends to be, but all of it is truly by people through taxes to support failures and bureaucrats. 

prains's picture

china is the economic model we're all being forced to adopt.... believe it or perish is their motto

mumbo_jumbo's picture

by that measure 2008 should have never happened.....then what did?

starman's picture

Fortune cookies anyone? I'm full thanks.

akarc's picture

"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."


"economic activity will start slowing down significantly and it could set up the "nightmare scenario" that I keep talking about."

And when?????????

"and it is inevitable that it is all going to come horribly crashing down at some point during the next few years."

"On a long enough time line the survival rate for everyone drops to zero"

Hedgetard55's picture

Fucking Chinks are going to find that there is no flee runch. Fuck them.

rustymason's picture

I guess it can just go on like this  f o r e v e r   . . .

cougar_w's picture

Yes, for all values of "forever" that are less than 6 months.

Julian's picture

If you know there is going to be a large default on January 31 and liquidity may be severely impacted, what do you do now to avoid this? Are we seeing it?

Rising Sun's picture

Hang on a sec and I'll go ask one of the dead floating pigs that is meanering down the river.

NoDebt's picture

Huge default?  It's $490MM.  It's an insignificant speck that is being announced as the small noise that will start the large stampede.  Who knows?  Maybe it will.  But I wouldn't bet on it.

If we start seeing similar defaults in rapid succession or increasingly large defaults in semi-rapid succession, yeah, you might have a problem.  But not from this one alone.

TheReplacement's picture

It is a crisis that can be used to build confidence.  Half a bill, lotsa warning and build up beforehand.  They pull it out.  All is and will be well.  BTFATH!

Then BOOM!  You dead.

pirea's picture

Now, this is a good reason to buy some gold. No wander the gold is going that direction.

OC Sure's picture

"Did you know that financial institutions all over the world are warning that we could see a "mega default" on a very prominent high-yield investment product in China on January 31st?"

So then this is already priced in? I forget but back in the fall of 2007/2008 were financial institutions all over the world warning of a mega default the size of a Lehman event?

q99x2's picture

Call me when there are pictures of blood in the streets. I ain't going for any of this "if" shit anymore. I'm still waiting for Greece to default.

It is possible that the Goldman Sach could conceivably want to take down China at this time as a means to take over its government as it did with the United States of America and the EU.

GS may also be worried that China will target Western Oligarchs.

Hughing's picture

The only "if" to keep in mind is if the CB's stop printing, then, the shit hits the fan. They will never stop printing.

stocktivity's picture

You got it...same shit for 5 years running. Now we're at all time highs. It's all Bullshit!

Poor Grogman's picture

After 2008 turbo timmah visited china, and shortly afterwards credit creation in China exploded!

Now China has overtaken uncle sugar as the worlds biggest oil importer?

It sure would be a shame if china now suffered a massive credit contraction and had to stop using all uncle sugars oil, for years and years?

Ask yourself, who benefits today if China's economy implodes?

DoChenRollingBearing's picture

The beneficiary?  The Central Bank of DoChenRollingBearing?

El Vaquero's picture


Ask yourself, who benefits today if China's economy implodes?

Certainly not retailers in this country, as they won't be able to get cheap chinese crap to sell to consumers. 

Poor Grogman's picture

I don't see Chinese credit contraction being the end of Chinese plastic crap exports.

It didnt do much to stop Japanese exports at least in the earlier part of their credit contraction.

HOWEVER....If the Chinese economy were to implode, how would this effect domestic consumption of AU .???

Also where would it leave their world reserve currency aspirations???

Now who benefits?.??

SDShack's picture

Don't forget that China was allowed to be a direct bidder for US treasuries in May 2012. That alone tells me there is much more to this relationship then meets the slant eye. That's why I don't think China is really interested in dumping treasuries. There is sum ting wong here.

ReactionToClosedMinds's picture

they are buying gold .....they are biding their time for their currency moment or whatever suits their fancy.  They know the West thnks they are over a barrell .......they have to pay attention to domestic politics and their 'transition' first

TheReplacement's picture

That fits with my multiparty, state/non-state power struggle.

Rising Sun's picture

Fuck this shit.  I'm ordering some take out.

buzzsaw99's picture

they won't count the losses there either

cougar_w's picture

Tanks in the street, really 4 realz.

I don't think the Peoples' Army will handle a serious banking crisis nearly the same way Hanky Paulson did.