The coming debt bust
May 16, 2016 3 Comments
You will, I hope, forgive me a personal note before we get down to business today. Yesterday was the fourth anniversary of my co-blogger, Jessica’s blog ‘All along the Watchtower‘ and we each had a piece or two there to celebrate. In truth of the blogs that we read when she started, or when I did ten months earlier, not all that many are left. She graciously said this, this morning:
As Neo reminds us, there have been ups and downs, and what with attempted censorship, my illness and people popping in and out, the wonder is we’re still here. I looked back at some of the earlier posts, and felt quite nostalgic at some of the bloggers who have come and gone since then, including some of our contributors. No one will, I hope, mind if I pay an especial tribute to Geoffrey Sales, who at times kept the blog going all by himself. I hope, too, no one will feel slighted if I pay a heartfelt tribute to Chalcedon451 who has kept the ship afloat despite his own heavy workload.
She’s right, If you dig back through the archive, you’ll find much that is interesting. You’ll even find a multipart story where many of us tried our hands at fiction. It could have been worse, and I’m surprised it wasn’t. Geoffrey and Chalcedon, have between them kept us going for many weeks when I was totally useless and Jess was very ill indeed. And I wanted to mention it here as well, because many of you are fond of Jess, and they are two of the best friends I, and this blog have. So do drop over and like her article, and maybe look around, it’s a lively fun place, for all that we are all serious about our Christianity.
Today we’re talking about the looming financial crisis, no not ours for once, at least not first. China has a pretty big problem staring them in the face. This is from the print edition of The Economist, and well worth taking note of.
CHINA was right to turn on the credit taps to prop up growth after the global financial crisis. It was wrong not to turn them off again. The country’s debt has increased just as quickly over the past two years as in the two years after the 2008 crunch. Its debt-to-GDP ratio has soared from 150% to nearly 260% over a decade, the kind of surge that is usually followed by a financial bust or an abrupt slowdown.
China will not be an exception to that rule. Problem loans have doubled in two years and, officially, are already 5.5% of banks’ total lending. The reality is grimmer. Roughly two-fifths of new debt is swallowed by interest on existing loans; in 2014, 16% of the 1,000 biggest Chinese firms owed more in interest than they earned before tax. China requires more and more credit to generate less and less growth: it now takes nearly four yuan of new borrowing to generate one yuan of additional GDP, up from just over one yuan of credit before the financial crisis. With the government’s connivance, debt levels can probably keep climbing for a while, perhaps even for a few more years. But not for ever.
When the debt cycle turns, both asset prices and the real economy will be in for a shock. That won’t be fun for anyone. It is true that China has been fastidious in capping its external liabilities (it is a net creditor). Its dangers are home-made. But the damage from a big Chinese credit blow-up would still be immense. China is the world’s second-biggest economy; its banking sector is the biggest, with assets equivalent to 40% of global GDP. Its stockmarkets, even after last year’s crash, are together worth $6 trillion, second only to America’s. And its bond market, at $7.5 trillion, is the world’s third-biggest and growing fast. A mere 2% devaluation of the yuan last summer sent global stockmarkets crashing; a bigger bust would do far worse. A mild economic slowdown caused trouble for commodity exporters around the world; a hard landing would be painful for all those who benefit from Chinese demand.
Continue reading at The coming debt bust | The Economist
This is not my field, obviously, but I know from a whole lot of experience, if you don’t get out in front of problems, they can really ruin your day, and it doesn’t look like China is anywhere near to solving this. If it blows up, it will have major repercussions for us all.