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The $23 Trillion Credit Bubble In China Is Starting To Collapse

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 titanic1    244





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.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system.  The following is from a Reuters article…

The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.

Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.

If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly.  A recent Forbes article explained why this is the case…

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.


The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China.  According to Forbes, M2 in China increased by 13.6 percent last year…

And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.

Overall, M2 in China is up by about 1000 percent since 1999.  That is absolutely insane.

And of course China is not the only place in the world where financial trouble signs are erupting.  Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”…

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.



China's financial services sector is a bubble in search of a pin. Toxic assets on the balance sheets of global banks have been a plague since the financial meltdown of 2008, but in recent months the specter of bad loans has been casting a darkening shadow over not just China's troubled economy but also the entire world.

The debt bubble in China is one of the biggest threats facing global stability today. According to some estimates, China's troubled credit could exceed $5 trillion, a mind-boggling sum that's roughly 50% of the country's annual gross domestic product. It puts China's bank stocks firmly onto a list of the most dangerous equities in the world.

China incurred this mountain of debt by lavishly spending on infrastructure projects (many of dubious value) to stimulate the flagging economy, as well as by propping up scores of state-subsidized "zombie" corporations deemed too big to fail.

The country's banks also lent generously to emerging markets that are now slowing, putting those loans at serious risk. Exacerbating the crisis is the country's persistent lack of accounting transparency, which at best can amount to "creative accounting" and at worst constitute outright fraud.


Right now, global markets are floundering thanks to a huge selloff in the Chinese stock market that has investors on the brink of panic… and the U.S. economy on the verge of collapse.

The financial media is in denial about China’s economy, and has been for years. Talk about how China is going to grow at 6% or 7% is flat-out ridiculous. If anything, the country’s economy is probably shrinking, thanks to the huge debt bubble that’s been growing since the last financial crisis.

Now it’s about to pop – and trigger a $200 trillion credit collapse… what I’m calling “The Super Crash.”

What we’re seeing now is only the beginning… things are about to get much, much worse. Not only in China, but here at home.

In fact, investors may be facing of one of the biggest market collapses they will see in their lifetimes.


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 Full Throttle    1,401

I see a Global reset in just about every arena,  economic, political, spiritual,  all of it.  Things just cannot continue as they are.  Pure common sense just almost screams it at us. ( Thats the way I see it Im a simple man.) 

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 Cinnamon    27,753
21 minutes ago, Quiet Storm said:

I see a Global reset in just about every arena,  economic, political, spiritual,  all of it.  Things just cannot continue as they are.  Pure common sense just almost screams it at us. ( Thats the way I see it Im a simple man.) 

Simple is better.  :)

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 Jostler    2,216

Titanic you just made it firmly onto my list of bullshitters I have no need to waste time clicking on.  Cut and paste stuff from a year, two yearors ago and pretend it's relevant just for attention?  or??

Why bother...no..don't even answer.  I don't want to know...ty again for bringing me to the point I know I can save time simply skipping your posts without fear of  missing a damn thing....adios :)

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