Does China go down the toilet in one fell flush, or is it more like the ghastly Japanese clog that hasn’t cleared in decades? Wolf Richter speculates, on wolfstreet.com:
Or Decades of Japan-Style Stagnation?
Last year, $674 billion fled China. This year through March, $175 billion did. The Institute of International Finance, in a report released today, estimated that $538 billion would flee China this year.
Reserves have plunged from $4 trillion in June 2014 to $3.2 trillion as of February. Much of it is illiquid and cannot be used to stabilize the currency. So the IIF said that capital flight could accelerate if Chinese investors fret that the yuan could fall in a “disorderly” manner.
This would have broader ramifications:
A sharp drop in the renminbi would likely spark a renewed sell-off of global risk assets and trigger a flight of portfolio capital from emerging markets.
Moreover, a sharp depreciation of the renminbi could lead to a round of competitive devaluation in other emerging markets, particularly in those with close trade linkages to China.
The report warned that an “important unknown” is the level of currency reserves that the Chinese government considers critical. If reserves drop below that level, authorities might either let the yuan fall sharply or tighten currency controls further, both of which would rattle markets around the world.
Add to this environment the growing fear of bond defaults by Chinese state-owned enterprises. Companies have extended large amounts of loans to each other, and defaults would ricochet through Corporate China.
To stimulate the languishing economy and to paper over the structural problems, overcapacity, over-indebtedness, and the mountain of non-performing loans after years of debt-fueled malinvestments, Chinese authorities decided to go on a historic credit binge.
In the first quarter, total domestic and foreign debt, according to calculations by the Financial Times, ballooned by 6.2 trillion yuan ($954 billion), the largest quarterly jump ever, to a record 163 trillion yuan ($25 trillion), or 237% of GDP.
Up from 148% of GDP in 2007. But hard numbers are hard to come by in China. The Financial Times: “Despite increasing attention to the risk from China’s rising debt, there is surprisingly little consensus over basic facts such as how much China actually owes.”
To continue reading: China’s “Lehman Moment?”
