We’ve written extensively about the debt powder keg in the United States.
But America isn’t alone drowning in a sea of red. China has a debt bomb all its own, and according to Jim Rickards, the fuse is burning short.
We tend to focus primarily on the US economy, but problems in other parts of the world could just as easily kick off a global crisis. Rickards has kept his eyes on China. He warned late last year that Chinese debt could ultimately threaten the world financial system. At the time, the IMF said the credit-to-GDP ratio was at around 25% above the long-term trend, “very high by international standards and consistent with a high probability of financial distress. As a result, corporate debt reached 165% of GDP, and household debt, while still low, has risen by 15 percentage points of GDP over the past five years and is increasingly linked to asset-price speculation.”
Things have not improved significantly this year. On top of that, China’s economy has slowed down. As Rickards points out, this isn’t surprising given that China’s growth — as much as 25% of the total — consisted of wasted infrastructure investment in ghost cities and “white elephant transportation infrastructure.”
“That investment was financed with debt that now cannot be repaid. This was fine for creating short-term jobs and providing business to cement, glass and steel vendors, but it was not a sustainable model since the infrastructure either was not used at all or did not generate sufficient revenue.”
Rickards said the slowing Chinese economy means exposing bad debt, creating the risk of a financial and liquidity crisis. And he points out another problem. Despite owning billions of dollars in US Treasuries, China is actually short the dollar. The Chinese can’t afford to tap into current reserves because they may be needed to bail out their banking system and/or defend the yuan.
“Meanwhile, the Chinese banking sector, which in many ways is an extension of the state, owes $318 billion in US dollar-denominated deposits of commercial paper. From a bank’s perspective, borrowing in dollars is going short dollars because you need dollar assets to back up those liabilities if the original lenders want their money back. For the most part, the banks don’t have those assets because they converted the dollar to yuan to prop up local real estate Ponzis and local corporations. There’s not much left over to bail out the corporate, individual and real estate sectors.”
As crazy as it seems, the Federal Reserve is actually creating a dollar shortage with its current tightening policy. It seems implausible in a world where the US central bank printed over $4 trillion out of thin air over the last decade. But as Rickards explains, that easy money fueled a global credit binge. The world borrowed over $70 trillion. We’ve said over and over — rising interest rates are bad news in a US economy built on piles of debt. They are also bad news for a global economy built on piles of debt.
Rickards says a Chinese debt bomb years in the making is finally getting ready to explode.
“The economy is slowing, debt is exploding and the trade war with Trump has hurt China’s exports needed to earn dollars to pay the debts. The defaults are beginning to pile up. Several large corporations and regional governments have defaulted recently.”
Rickards says Chinese leadership has panicked at the economic slowdown and have decided to throw some more fuel on the fire. They’ve reopened the credit spigot with “lower interest rates, higher bank leverage and more debt-financed, government-directed infrastructure spending.”
China has the second largest economy in the world behind the US, accounting for nearly 15% of the global economy, according to World Bank figures. As Rickards pointed out, if things crash there, it will certainly reverberate around the world.
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