China Is On The Verge of Losing Control Over The Credit System
Beijing is on the verge of losing control.
…Chancellor and Monnelly argue that there are still at least 10 indicators of “acute financial fragility” in China’s credit system. Here they are verbatim:
- Excessive credit growth (combined with an epic real estate boom)
- Moral hazard (i.e., the very widespread belief that Beijing has underwritten all bank risk)
- Related-party lending (to local government infrastructure projects)
- Loan forbearance (aka “evergreening” of local government loans)
- De facto financial liberalization (which has accompanied the growth of the shadow banking system)
- Ponzi finance (i.e., the need for rising asset prices to validate wealth management products and trust loans)
- An increase in bank off-balance-sheet exposures (masking a rise in leverage)
- Duration mismatches and roll-over risk (owing to short wealth management product maturities)
- Contagion risk (posed by credit guarantee networks)
- Widespread financial fraud and corruption (from fake valuations on collateral to mis-selling of financial products)
“Not only does financial fragility look to be on the rise, Beijing seems to be on the verge of losing control over the credit system,” they write.
Andy Xie on Why Money Can’t Buy Growth
Andi Xie has published an interesting article at Caixin Online entitled “Money Cannot Buy Growth”. He makes a number of arguments we have also made here in the past. A few excerpts:
“In the four years after the global financial crisis that began in the summer of 2008, the United States’ monetary base more than tripled and China’s M2 has doubled. This is the greatest experiment in monetary stimulus in modern economic history.
Staving off crisis and reviving growth still dominate today’s conversation. The prima facie evidence is that the experiment has failed. The dominant voice in policy discussions is advocating more of the same. When a medicine isn’t working, it could be the wrong one or the dosage isn’t sufficient. The world is trying the latter. But, if the medicine is really wrong, more and more of the same will kill the patient one day.”
We would add to that: even if the ‘prima facie evidence’ were to show otherwise, this would still not constitute proof that the ‘medicine is working’. After all, whether money printing and the concomitant artificial lowering of interest rates ‘work’ in the sense of improving economic statistics is largely a function of the state of the economy’s pool of real funding. This is why it appeared to policymakers and most observers in 2004-2007 that the massive monetary pumping initiated by the Greenspan Fed after the collapse of the Nasdaq bubble had ‘worked’.
Andy Xie – Signs of Stress in the Chinese Economy