Tuesday, February 23, 2016

We All Go Down With China

The first of the articles you link to says, “It is this slowdown in China’s debt creation that is the true reason behind the global growth slowdown experienced both in China and around the globe.” This hits the nail on the head, in my view. Unless debt can keep increasing by leaps and bounds, demand stagnates or falls, and commodity prices “tank.”

What is behind this is Beijing’s crackdown on the type of debt creation used by local governments. Previously, (as I understand the situation) these governments were given growth targets and freedom to reach these targets using as much debt as needed. In January, 2015, the central government withdrew guarantees for the Local Government Financing Vehicles, so local governments cut back on infrastructure projects like roads, subways, and reservoirs.

Somehow, this withdrawal of government guarantee sound a whole lot like the link that Stepheun recently gave us, with respect to the Federal Reserve removing its backup funding for banks.http://www.examiner.com/article/fed-votes-to-end-original-mandate-of-being-the-lender-of-last-resort-to-banks All of the guarantees on banks, allow them to invest in risky operations. I suppose one reasons could be to try to rein in bank operations, by putting them more at risk. But the net effect for the economy can be bad, if we really need rising debt levels. - Gail Tverberg

- China Unleashes A Debt Tsunami: Creates $1 Trillion In Debt In First Two Months Of 2016
«The downside to the surge in lending is that while it could support economic growth as the government undertakes much-needed structural reforms, it is also increasing the country’s already high debt burden. Credit is still growing much faster than even nominal GDP, which means China is getting far less economic bang for every yuan of lending.

Finally, recall that according to a Rabobank analyst, China’s debt/GDP is already at 350%. At this rate, it will surpass Japan’s 400% debt/GDP within the year, making China the most indebted nation in the world.

Most importantly, however, is that while the threat of NPLs coming to the fore has been a major concern for many China watchers, the indiscriminate surge in Chinese debt issuance means that the trillions in bad loans will be promptly masked by all the new loan issuance. It also means that China’s day of reckoning has likley been pushed back by at least 1 or 2 quarters.»

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