Hellraiser007
FULL MEMBER
- Joined
- Aug 2, 2012
- Messages
- 1,971
- Reaction score
- -3
China's Pending Credit Crisis
The Chinese GDP growth story is by no means news at this point. For 2013 to 2015, growth estimates remain high at a CAGR of 8.77%. But the former isolationist nation has, without doubt, already experienced its fastest growth for this cycle. This is troubling in light of the fact that Chinese credit expansion is running sky-high. Some say China's pending credit crisis resembles the U.S. circa 2007, but it may actually trump the U.S. credit bubble by a shocking magnitude. Investors around the world need to be aware of the current situation, as it has the capacity to affect the global economy (and your investments).
Credit-happy
The U.S. is no stranger to credit. At the height of our country's own credit binge, the total credit provided by the banking sector was 244.4% of GDP. At its current rate of growth, China's credit-to-GDP ratio could easily hit 240% to 250% -- and continue ballooning from there. The World Bank has the ratio at 155.1% at year-end 2012, but with the five-year trailing CAGR of bank assets as measured by the China Banking Regulatory Commission at more than 30% (and climbing), its clear this is a runaway train. By the way, that's three times the rate of U.S. credit growth at our hungriest levels (2006 to 2007).
Now, as Kyle Bass of Hayman Capital pointed out in a recent investor letter, the credit growth has been the driver of China's amazing GDP growth, even while major economies in Europe and the Americas have stumbled. In Bass' words, "The Chinese authorities share the faith ... that sufficient expansion is the tide that will lift all boats above the threatening rocks of structural inefficiencies and accumulated macroeconomic imbalances." It's similar to U.S. economic policy, but China's is on a different level. The risks, therefore, are far greater, and the tools to buoy growth are losing efficacy.
Diminishing returns
Supporting credit expansion makes sense in times of deep economic strife, but the tactic loses its strength as time goes on. Bass notes that from the beginning of the year through March, Chinese credit expanded by 18 trillion RMB, while GDP grew just 5 trillion RMB. The money is getting sopped up by companies that have been encouraged to lever up and increase working capital, which makes their financial condition look stronger in the short term.
The risk here is most analogous to what happened on our shores: the burst of the credit bubble.
If Chinese regulators do not take action to reign in the ballooning credit situation, there is a decent chance that things will reach a breaking point, and the Chinese economy could then slip into a recession, bringing down asset prices and real-estate values. If it sounds like an old tale at this point, it is.
The Chinese GDP growth story is by no means news at this point. For 2013 to 2015, growth estimates remain high at a CAGR of 8.77%. But the former isolationist nation has, without doubt, already experienced its fastest growth for this cycle. This is troubling in light of the fact that Chinese credit expansion is running sky-high. Some say China's pending credit crisis resembles the U.S. circa 2007, but it may actually trump the U.S. credit bubble by a shocking magnitude. Investors around the world need to be aware of the current situation, as it has the capacity to affect the global economy (and your investments).
Credit-happy
The U.S. is no stranger to credit. At the height of our country's own credit binge, the total credit provided by the banking sector was 244.4% of GDP. At its current rate of growth, China's credit-to-GDP ratio could easily hit 240% to 250% -- and continue ballooning from there. The World Bank has the ratio at 155.1% at year-end 2012, but with the five-year trailing CAGR of bank assets as measured by the China Banking Regulatory Commission at more than 30% (and climbing), its clear this is a runaway train. By the way, that's three times the rate of U.S. credit growth at our hungriest levels (2006 to 2007).
Now, as Kyle Bass of Hayman Capital pointed out in a recent investor letter, the credit growth has been the driver of China's amazing GDP growth, even while major economies in Europe and the Americas have stumbled. In Bass' words, "The Chinese authorities share the faith ... that sufficient expansion is the tide that will lift all boats above the threatening rocks of structural inefficiencies and accumulated macroeconomic imbalances." It's similar to U.S. economic policy, but China's is on a different level. The risks, therefore, are far greater, and the tools to buoy growth are losing efficacy.
Diminishing returns
Supporting credit expansion makes sense in times of deep economic strife, but the tactic loses its strength as time goes on. Bass notes that from the beginning of the year through March, Chinese credit expanded by 18 trillion RMB, while GDP grew just 5 trillion RMB. The money is getting sopped up by companies that have been encouraged to lever up and increase working capital, which makes their financial condition look stronger in the short term.
The risk here is most analogous to what happened on our shores: the burst of the credit bubble.
If Chinese regulators do not take action to reign in the ballooning credit situation, there is a decent chance that things will reach a breaking point, and the Chinese economy could then slip into a recession, bringing down asset prices and real-estate values. If it sounds like an old tale at this point, it is.
this Hellraiser007 guy seems to be on PDF 24/7. The guy has absolutely no life. No job. No woman in his life. No friends. Never leaves the house. Just a bum living with his parents wasting his life posting articles on PDF 24/7. Just a waste of sperm loser.
