The last recession from which much of the world’s economy has not yet escaped was caused in the USA by US debt. The next and possibly worse recession will likely be caused by hugely excessive Chinese debt. Common thinking in the US is that China owns vast amounts of US debt and is economically “eating our lunch.” As one commentator remarked recently that way of thinking is “so last decade!” Prior to the 2008 market crash and onset of the Great Recession China indeed used to manipulate its currency to maintain a prosperous trade balance with North America, Europe and most of the world. Today China is struggling to keep the value of its currency from falling in order to stem the flow of capital leaving the country. We remarked on this phenomenon in our article about Chinese companies hit by Yuan devaluation. Why are things different in China? Debt is a huge issue in the land of “managed capitalism.” According to an article in Bloomberg Markets China debt load is much higher than previously thought.
Count total social financing (TSF) as another Chinese statistic of increasingly dubious value, according to analysts at Goldman Sachs Group Inc.
With many investors grappling to understand the degree to which China’s economic growth has been fueled by debt, efforts to get a grip on measures of new credit creation have gained fresh urgency. To date, many have relied on the TSF invented by the Chinese authorities in 2011 as a way of capturing a larger slice of the country’s shadow banking activity, but Goldman analysts led by M.K. Tang cast fresh doubt, in a note published on Wednesday, on the measure’s ability to gauge credit creation.
They identify a discrepancy between China’s official TSF and Goldman’s new proprietary estimates of credit, describing the increasing difference as “an uncomfortable trend that has gotten more discomforting.”
The story in China is reminiscent of what happen in the USA leading up to the Great Recession. Banks are finding new and creative ways to rake in profits while their balance sheets become less and less trustworthy. More and more money is “meandering through the financial system” and not being used in the real economy to increase money supply, create jobs and help China move from an export driven system to a more balanced and consumer driven society. How did this addiction to debt come to China?
Stimulus in the Wrong Places
A relatively small group of people runs China. Some had grandfathers who were on the Long March with Mao Tse-tung. Their way of doing things is strictly from the top on down and the first line of beneficiaries are the friends and families of the old Communist elite. This has led to really bad loans being dished out to heavy industry at a time after the Great Recession when world trade and especially exports from China were shrinking. It is one thing if a viable and growing company takes on debt because it can pay it off. It is another if money was loaned via the good-old-Communist-boy network for a steel or cement factory that has no orders and probably never will. It gets worse when the owners of the factory buy property offshore in advance of skipping town and sticking the Chinese system with the debt. (Chinese Investment in America)