"Off The Charts" How China Fooled The World

Tyler Durden's picture

China is now the second largest economy in the world and for the last 30 years China's economy has been growing at an astonishing rate, wowing the world, as spending and investment has been undertaken on a scale never seen before in human history - 30 new airports, 26,000 miles of motorways and a new skyscraper every five days have been built in China in the last five years. But as we (and Michael Pettis, George Soros, and Jim Chanos - among many others) have warned, it is all eerily reminiscent of what happened in the West... the vast majority of it has been built on credit. This has now left the Chinese economy with huge debts and questions over whether much of the money can ever be paid back (spoiler alert: it can't and it won't).

The BBC's Robert Peston travels to China to investigate how this mighty economic giant could actually be in serious trouble.

As Michael Pettis, Jim Chanos, Zero Hedge (numerous times), and now George Soros have explained. Simply put -

"There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years."

The "eerie resemblances" - as Soros previously noted - to the US in 2008 have profound consequences for China and the world - nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained above.

 

Tired of reading about it? Then spend 2 minutes of your life with the following uncomfortable truth clips...

The past 5 years in China...

 

And here is Fitch's Charlene Chu (in a little over 60 seconds) laying out the ugly facts that are China's credit bubble...

 

Of course, the situation has become critical now as reform-imposed credit-crunch is rapidly spreading up the food chain proving that China has no painless way out and can only stoke the fire more in their already-burning house - as we noted here...

 

January's data was simply the final exclamation mark in a decade-long series in which China's prosperity has been simply the result of an exponentially increasing amount of loan and liquidity creation by the Chinese semi-national and government backstopped financial system.

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Here's the problem: one can't put the January lending surge aside, as it came at a time when for the second time in six months the PBOC tried to taper, only to be forced to not only bail out its money markets, but is on the verge of a bankruptcy tsunami involving its shadow banking products, the first of which it also bailed out despite repeated warnings this time it means business and would let it die.

In this context, the January number is precisely what it appears: the bank's logical response to a liquidity crunch as the Chinese regime finds itself in the same spot that the Fed has been in for the past 5 years - it must keep the monetary spice flowing, or else the party is over. And just like the Fed, and now the BOJ, so too does China not want to deal with the fall out if all it takes to created yet another quarter of increasingly subpar economic growth is another record of funny money conceived out of thin air.

The only problem is that it is becoming increasingly difficult to hide all the pieces of funny money, most of which result in bad and otherwise impaired loans, under the rug. And just to show the problem in its context, here is how China's banks created some 50% more in bank loans in January than the QE credit money created by both the Fed and the BOJ combined.

 

And finally, here is China's nearly half a trillion in total liquidity added to the system in just one month (some deleveraging, right?) looks compared to the Fed and the BOJ's much maligned and unprecedented unconventional monetary policy.