Tuesday, February 18, 2014

When PRC Crashes....

The Beeb is putting forth a 2-part documentary which reveals a problem.

...with encouragement from the US government (we interviewed the then US Treasury Secretary, Hank Paulson), the Chinese government unleashed a stimulus programme of mammoth scale: £400bn of direct government spending, and an instruction to the state-owned banks to "open their wallets" and lend as if there were no tomorrow.

Which, in one sense, worked. While the economies of much of the rich West and Japan stagnated, boom times returned to China - growth accelerated back to the remarkable 10% annual rate that the country had enjoyed for 30 years
....quoted at Mish's place

Ain't that good?

Not necessarily.

...what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China's debts as a share of GDP have been rising at a very rapid rate of around 15% of GDP, or national output, annually and have increased since 2008 from around 125% of GDP to 200%.

"Most people are aware we've had a credit boom in China but they don't know the scale. At the beginning of all of this in 2008, the Chinese banking sector was roughly $10 trillion in size. Right now it's in the order of $24 to $25 trillion.

"That incremental increase of $14 to $15 trillion is the equivalent of the entire size of the US commercial banking sector, which took more than a century to build

That merry-go-round is stopping.  We've already seen some of the effects:  Cat/Bucyrus is cutting its workforce and P&H/Joy will be next, as will Manitowoc Cranes.  That's just here in Wisconsin.

When debtors stop repaying the banks, banks stop lending (and depositors are threatened.)  All that spending in PRC on cars--many of them American--will slow, if not stop, too.

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