The China credit bubble

We discussed China’s credit bubble on February 7, 2015 in a piece called ‘Capitalism died a long time ago’ ( see:

It was pointed out just before the crisis in 2007, that China’s GDP has doubled, expanding by $5 trillion in 7 years, but that it took a $21 trillion expansion of debt to accomplish this. Thus China’s Ponzi scheme actually created $4 of debt for every $1 of additional GDP.

Now we begin to see some results. As Doug Noland points out (in: we have had a revelatory stock market melt-down in China, and goes on:

Never have so many Chinese owned (over-priced and poorly constructed) apartments. Never have Chinese citizens, governments, financial institutions and corporations accumulated so much debt. Never have the Chinese had so much invested in securities markets. China has zero experience with a multi-trillion (yuan or dollars) “shadow banking system.” Never have so many invested so much in “wealth management” vehicles and other sophisticated financial products, without a clue as to where their “money” was directed. And when it comes to corruption, I seriously doubt history offers a like comparison.

The Chinese – apartment owners, bankers, Internet financiers and policymakers – have never experienced the downside of a massive Credit Bubble. Never has China experienced Trillions of “money” that retains “moneyness” chiefly on the perception that the all-knowing central government will safeguard its value. Never have Chinese finance and spending had such major impacts around the world. China does, however, have a long history of financial panics.

A week after blaming short sellers and foreigners and employing unprecedented market intervention, officials this week espouse a preference for market forces to play a prominent role in setting the value of the Chinese currency. Credibility – so vital in markets and as the bedrock of money and Credit – can dissolve so quickly. Clearly, the Chinese will rely on market forces only so long as the markets are operating consistent with their policy aims.

Chinese officials hold grand ambitions for global economic, financial and military supremacy – a vision brought into keen focus during this protracted Bubble period. In the near-term, however, their fixation has shifted to ensuring that everything doesn’t come crashing down. Collapse would see the focus shift to villainizing foreigners, maintaining social order and retaining power.