China facing full-blown banking crisis, world’s top financial watchdog warns, by Ambrose Pritchard-Evans.
China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog.
A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late.
The Bank for International Settlements [BIS] warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.
Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. …
The BIS said there are ample reasons to worry about the health of world’s financial system. Zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy, or even a hint of a shift. …
The risks are well understood in Beijing. The state-owned People’s Daily published a front-page interview earlier this year from a “very authoritative person” warning that debt had been “growing like a tree in the air” and threatened to engulf China in a systemic financial crisis.
China’s credit growth (read: money manufacture — over 90% of money today is money in bank accounts, called “credit” by the banks) saved Australia in 2008 when the Chinese ramped it up from 14% pa to 28% pa. It has been eased back since, but not enough. There is way too much credit and debt (credit is created by the act of taking out a loan) in the Chinese economy (even compared to the West). Even though the Chinese run a one party command and control economy at base, if the meaning and promise of money fails then people simply won’t work as much and their economy will falter. There is no historical precedent for anything on this scale — the ratio of credit to GDP easily surpasses the USA in 1929.
The problems all revolve around money and debt. There is too much debt for it ever to repaid meaningfully (in money worth roughly what it is worth today), so either debt has to be forgiven (unlikely) or there will be an almighty inflation (likely). The same problem exists at a lower level, albeit much higher than in 1929 USA, throughout the western world. You might want to take action before it is too late. As they say financial circles, “don’t panic, but if you are going to panic make sure you are the first.” Sales of GoldNerds subscriptions have jumped dramatically recently.
hat-tip Stephen Neil