$23 Trillion Credit Bubble In China Is Starting To Collapse

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Off the World News Desk:

$23 Trillion Credit Bubble In China Is Starting To Collapse – What Next?

“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…”

See also:

Chinese Banks Are Jumping Into A Business Western Banks Are Dropping Left And Right

“While Western banks are selling their commodities-trading units left and right, Chinese banks are itching to get into the business, says George Chen of the South China Morning Post.

China Merchants Securities (CMS), mainland China's 6th largest brokerage by assets, just launched a subsidiary in Britain to expand into commodities markets with a focus on derivatives trading.

Last year, Morgan Stanley was in talks to sell its commodities-trading division to China International United Petroleum & Chemicals. In August, Guangzhou-based GF Securities bought French bank Natixis' commodities trading unit for $36 million.

There are a number of reasons why Western banking giants like JP Morgan are getting out of the business. For one, it's risky trading, and since the financial crisis, banks have been under pressure from regulators to mitigate risk from trades on their balance sheets in order to preserve capital.

And proprietary trading, as you know, is a no-no now.

Another reason that Western banks have started selling these businesses is because they're simply not as profitable as they used to be. The Goldman Sachs Commodities index has dropped 57 percent since it hit its peak in 2008.

Lastly, these trading units have been getting in trouble lately. For example, The Federal Energy Regulating Commission recently fined JP Morgan's energy trading unit $410 million for manipulating electricity markets. That unit, J.P. Morgan Ventures Energy Corp., trades not only physical commodities but also their derivatives. It is set to be sold, potentially, along with the bank's metals futures brokerage.

For some, the news that China's banks are picking up these businesses is problematic for three reasons…”




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