China’s debt reckoning cannot be deferred indefinitely - FT.com
. . . instead it is simple inflating an already inflated, and fraudulent economy.
"Timing the end of a credit boom is more luck than judgment. There is no question that lenders own bad loans, reckoned unofficially by some banks and credit rating agencies to amount to about 20 per cent of total assets, the equivalent of around 60 per cent of GDP. These will have to be written off or restructured, and the costs allocated to the state, banks, companies or households. Yet in a state-run banking system, where loans can be extended and there are institutional obstacles to realising bad debts, the day of reckoning can be postponed for some time.
More likely, the other side of the lenders’ balance sheets, or their liabilities, is where the limits to the credit cycle will appear sooner. Loans have to be funded by deposits, and China’s banks are venturing beyond fairly stable household deposits to more volatile funding sources in the shadow finance, interbank and corporate markets and overseas. Growing dependence on these liabilities renders the banking system, and the economy as a whole, more vulnerable to withdrawals that are prone to happen suddenly or when lenders lose confidence in economic and financial stability, as we know from 2008."
This is an incredibly precarious position to be in for China. Add to this the fact that China is seeing a massive bums rush expatriation of money. This has driven home prices in Vancouver, and many parts of the West Coast into the stratosphere. China has been very lucky up to this point. However, what it was doing was fairly simple, in that it was adopting the earlier model that the West used to become wealthy. However, that model will only take China so far, and the next step requires the Chinese to innovate, and there is no evidence they can do so.
"For the foreseeable future, China’s neglect of the problem of excessive debt growth looks likely to continue. Beijing cannot afford to spark a disruptive end to the credit boom and a slump in investment, with anecdotal signs of rising labour unrest and unemployment — especially before next year’s 19th party congress, where President Xi Jinping plans to consolidate his support at the upper levels of the Communist party.
The question, then, is whether the politics of debt control will shift after the congress. With a slowing economy and rising financial instability risks, it is hard to imagine Beijing making a strong commitment to cut credit dependency and impose debt management policies such as more defaults and write-offs, the sale of national assets, and the transfer of wealth from indebted state companies and local authorities to private sector households and creditors.
Yet, without such a shift, China is likely to experience greater financial turbulence than it has seen recently, which may not happen by the end of this year but will not take three years either. The main outcome would probably be a growth hiatus of unknown duration, for which the rest of us need to be prepared."
The when question is unknowable, the next question is how severe.
Take essential precautions, and make sure that if China has a rough landing you are nominally protected. I am assuming that once it goes it will be a doozy!