China may finally be acknowledging what was obvious trillions of yuan in debt ago: it has reached the point where the marginal burden of debt is greater than any marginal benefit. From John Rubino at dollarcollapse.com:
Something interesting has happened. China earlier this year responded to falling stock prices by borrowing a trillion dollars and spending it on commodities, boosting the prices of iron ore, oil, copper, etc., and giving the global economy a patina of recovery.
Nothing unusual so far. China did the same thing in response to 2008’s Great Recession, and the world breathed an appreciative sigh of relief, ignoring the massive new leverage that the policy required.
Which is why the past month has been so interesting. Instead of just accepting China’s largess and blithely assuming that all was once again well, the global financial media have chosen (for perhaps the first time ever outside of a full-on crisis) to focus on the negative aspects of rising leverage. They’re now anticipating trouble for China, with titles like:
China’s debt problem is bigger than you think
Chinese banks grappling with ‘crisis level’ bad debts
CLSA Sees China Bad-Loan Epidemic With $1 Trillion of Losses
The $571 Billion Debt Wall That Points to More Defaults in China
To call this unusual is a huge understatement. And it seems to have made a difference. Yesterday China announced a fairly radical course change:
Even China’s Party Mouthpiece Is Warning About Debt
(Bloomberg) – China’s leading Communist Party mouthpiece acknowledged the risks of a build-up of debt that is worrying the world and said the nation needed to face up to its nonperforming loans.
High leverage is the “original sin” that leads to risks in the foreign-exchange market, stocks, bonds, real estate and bank credit, the People’s Daily said in a full-page interview with an unnamed “authoritative person” starting on page one and filling the second page on Monday.
China should put deleveraging ahead of short-term growth and drop the “fantasy” of stimulating the economy through monetary easing, the person was cited as saying. The nation needs to be proactive in dealing with rising bad loans, rather than delaying or hiding them, the report said.
“Overall, the report suggests to us that future policy easing may be more cautious and that the government may try to hasten the pace of reform,” said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. Similar commentaries have had a “large impact” in the past, the analyst said in a note.
The pace of China’s accumulation of debt and dwindling economic returns on each unit of credit have fueled concern that the nation is set for either a financial crisis or a Japanese-style growth slump. Strong growth in mortgage lending means that banks could be exposed to significant losses should property prices drop sharply, Fitch Ratings said in a statement dated Sunday.
“A tree cannot grow up to the sky — high leverage will definitely lead to high risks,” the person was cited as saying. “Any mishandling will lead to systemic financial risks, negative economic growth, or even have households’ savings evaporate. That’s deadly.”
To continue reading: China Stops Trying To Fool The World; World Is Sorry
