China’s $24 Trillion Debt Bubble

• China’s Second Largest Securities Firm Issues Latest Warning. Haitong Securities, China’s second largest brokerage, is warning investors that China’s soaring debt levels threaten to trigger a new financial crisis. According to the latest estimates, liabilities held by China’s non-financial firms may exceed 150% of GDP in 2014. “We are concerned that the debt snowball may get bigger and bigger and turn into a crisis,” said Li Ning, a bond analyst at Haitong Securities. “Default probabilities from next year may rise because more and more Chinese companies depend on new borrowings to repay old debt.”
• China’s $24 Trillion Debt Bubble. By now, many investors know that since 2008, credit in China has exploded by $15.4 trillion, from $9 trillion to an astounding figure of $24 trillion — as much as the U.S. and Japanese banking systems combined. (In comparison, total U.S. bank assets grew by just $2.2 trillion during this same time period!) China’s monetary authorities are now attempting to rein in the world’s biggest credit bubble, which remains extremely vulnerable to higher borrowing costs. The astounding growth in Chinese credit in recent years is unprecedented, and easily qualifies as the largest bubble in world history. Over the past five years, credit growth in China has grown by nearly 30% annually, far outpacing China’s 8% +/- annual GDP figures. To put this in perspective, China’s rate of credit growth is far greater than that which preceded the bursting of Japan’s property bubble in 1990, South Korea’s 1998 crisis, and even the more recent explosion of subprime credit in the U.S. In classic style, China has attempted to manage perceptions by banning journalists from reporting on this $24 trillion debt bubble, which has become a ticking time bomb as local interest rates begin to skyrocket. Meanwhile, hot money continues to flow out of China. Record amounts of wealthy Chinese investors are moving money out of the country into foreign asset classes (U.S. and European real estate, precious metals, etc.) What’s next? Perhaps a meaningful increase in oversight, or even a TARP-style bailout. But it is virtually impossible that China, and the world economy, will escape this monetary madness unscathed. It’s time to prepare.

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