And when (not if, boys and girls, but when)it does, we’ll be lucky if we avoid 25% unemployment:
China’s banks are veering out of control. The half-reformed economy of the People’s Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.
Money is leaking instead into Shanghai’s stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.
Fitch Ratings has been warning for some time that China’s lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.
“With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary,” it said.
“Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear.”
Note the phrase “able to bear”. Fitch’s “macro-prudential risk” indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al). This is a surprise to me but Michael Pettis from Beijing University says China’s public debt may be as high as 50pc-70pc of GDP when “correctly counted”.
China has been honeycombed with bad debt for two decades – masked by an exceptionally good trade balance which allowed China to continue to float those bad debts. The debts in question are to institutions and individuals well-connected with the Chinese power elite…its not like these guys have to undergo a credit check or that there’s any chance a Chinese bank will deny them a loan, know what I mean? Now that China’s trade balance is collapsing (later in the linked article it is noted that Chinese exports fell 26% in May), there isn’t this influx of cash to balance the books. Meanwhile, China has to find cash, somehow, to buy US debt because if US debt becomes worthless, one trillion dollars of China’s wealth becomes worthless.
It can’t be sustained – you cannot spend your way to wealth and you cannot forever have an economy geared towards rewarding a tiny, powerful elite. Its all going to come crashing down rather soon and rather hard – and then all that debt Obama wants to sell will become worthless and all the money the Fed has printed will become worthless and we might wind up with the fun, fun, fun of high unemployment, high inflation and high interest rates. Welcome back, Carter – but worse: this will be Revenge of the Carter. Even if we avoid “stagflation”, its clear we’re heading in to some really bad times (anecdote: at the corporation I work for, we’re usually busier than a one-armed paper hanger on Mondays…it was very quiet for most of the day…and then only modestly busy later).
From what I can see, there’s no way to avoid what is coming – the Chinese bubble will burst and it will ripple through the entire global economy. It won’t be pretty – and it will be made worse if we keep trying to borrow and spend our way out of it.
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