Tuesday, February 18, 2014

China Gets Lots of Credit (excerpt)

On our website, we have 14 “Country Briefing” publications that are automatically updated to track the key economic and financial variables in each of the countries. There’s one on China, which includes 60 charts. The last chart shows Chinese bank loans outstanding, valued in dollars, divided by US bank loans outstanding. Perhaps we should make this chart the first one in the publication because it may turn out to be the one that matters most for China’s economic future. Consider the following:

(1) Bank loans. When China joined the World Trade Organization during December 2001, the country’s banks had $1.4 trillion in loans outstanding, which was equivalent to 35% of US commercial bank loans. At the start of this year, Chinese bank loans rose to a record $12 trillion, now equivalent to 162% of their US counterparts! Those numbers don’t include the lending of the shadow banking system.

(2) Deflation. Coal companies seem to be at the epicenter of the current rising default risks in China’s shadow banking system. That’s because coal prices are falling. So are other industrial prices, according to China’s PPI, which is down 1.6% y/y through January. It has been deflating since March 2012. China’s CPI is still inflating at a moderate pace, with an increase of 2.5% y/y through January.

The combination of lots of debt and mounting deflationary pressures increases the risks of a credit crisis in China.

Today's Morning Briefing: Scary Parallel? (1) Seeing a pattern. (2) Bearish technicians waiting for Godot. (3) Hindenburg and Hulbert omens. (4) Manipulating the scales to maximize the fear factor. (5) The great crash in commodity prices and the Smoot-Hawley Tariff. (6) Is Godot Chinese? (7) Do WMPs = WMFD? (8) Credit = Gold vs. Debt = Lead. (9) China's LTCM? (10) China’s deflation problem. (11) China makes world trade go round. (12) No credit crunch in China. (13) Focus on market-weight-rated S&P 500 Retailers. (More for subscribers.)

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