Fitch says China credit bubble unprecedented in modern world history … China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses. – UK Telegraph
Dominant Social Theme: China is the coming monster on the international stage. A real capitalist success story.
Free-Market Analysis: At the end of this article, we'll reveal where the "malpractice" mentioned in this headline lies. But first, at the risk of repeating ourselves, let us remind readers, "We told you so."
For years we've been writing that the Chinese Miracle is nothing more than the Japanese Miracle writ large and that it would have a similarly messy end. This seemed obvious to us, and increasingly to others.
Some background. Western powers, especially the US, made a deal with Japan in which Japan printed money and then funneled that money to the US, especially, to fund the US deficit. In return, Japanese products were facilitated in the US and the Japanese economy boomed.
The result was that the Japanese economy was further Westernized and huge multinationals emerged out of Japan. The US did well, also, funding its vast military-industrial complex for a decade.
When the Japanese Miracle sputtered, the same sort of deal was made with China. And that has been underway for what looks like at least two decades. Now the Western powers are gearing up to do this in Africa. Probably won't work. But there are obviously efforts underway and we've written about them a good deal.
In part, we figure attention is turning to Africa because the Chinese Miracle is beginning to fizzle. It seems to be running down now just the way the Japanese one did. Central bank stimulation can only go so far before it ruins an economy, and the Chinese economy is in a fair bit of trouble now.
Don't say we didn't warn you.
We've explained for years, in the face of a tidal wave of mainstream China adulation – that the Chinese model of capitalism was a kind of Potemkin Village. It appeared to be competitive but at the top it was nothing of the sort. The ChiComs were in power and are still in power and when and where it mattered there was only an appearance of competition.
We're supposed to believe that after thousands of years of poverty, authoritarianism and warfare, the Chinese socialist model managed in 30 years to bring peace and prosperity to 1.3 billion people. Not really …
The engine of the Great Chinese Boom is not, unfortunately, the hard work and intelligence of a cohesive, wise and ancient culture but likely the incredible monetary stimulation of the modern Chinese central bank. The great Chinese prosperity was probably in large part no more than a credit bubble, the biggest the world has ever seen. And now Fitch is saying the same thing. Here's more:
The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead. "The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.
"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.
While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.
Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system. Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up.
"Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said. Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses. This niche is the epicentre of risk.
All this will be familiar to Daily Bell readers. We've been writing about the lack of transparency, about the impossibly vast central banking-fueled real estate expansion, about how the ChiComs themselves will do anything to keep the bubble expanded because a contraction may cause the entire system to collapse.
Years later, Fitch agrees. With tens of millions in resources, prestigious contracts for analysis around the world, top young minds from the best colleges … Fitch has brought its tremendous acumen to bear and discovered … what? Things the Internet has warned about for years.
We're not that brilliant, of course. We don't need to take any bows. We just apply the Austrian, free-market paradigm. It allows us to see clearly what's taking place in this weary world.
But credit agencies like Fitch resolutely refuse to use the model. This is a kind of crime; these agencies should be sued for a deliberate lack of competence. All of them missed the Great Crash of 2008-2009, as well.
In fact, from what we recall, not a single Wall Street agency or researcher anticipated the greatest downturn since the Great Depression. Neither did Ben Bernanke, who defended the credit bubble right up until it collapsed.
Libertarian Congressman Ron Paul warned about it. But they called him a crank. Still do. But the Austrian, free-market business cycle model has predicted everything taking place today. Not Keynes. Not Gesell. Not Bernanke.
Even now, some five years later, the top men of these ratings agencies are consistently surprised by the world's ongoing macro-failures. We're supposed to be surprised, too. But we're not.
It is the crime of the modern age, the real scandal of the 21st century, that economics and the securities industry continue to resolutely ignore the one paradigm that works.