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And now for something completely different: CHINA

This is what the China Daily wrote about the debt problem:

People’s Daily article published yesterday showed that China’s leadership is trying to make a grand shift in the nation’s economic policies in a bid to say goodbye to debt ­fuelled growth. In a sign of distaste for the credit-pumped growth in the past couple of months, the Communist Party mouthpiece cited an unidentified “authoritative” figure as saying that boosting growth by increasing leverage was like “growing a tree in the air” and that a high leverage ratio could lead to a financial crisis

The Economist of May 7 wrote (in a massive reversal of past position):
China will not be an exception to that rule. Problem loans have doubled in two years and, officially, are already 5.5% of banks’ total lending. The reality is grimmer. Roughly two-fifths of new debt is swallowed by interest on existing loans; in 2014, 16% of the 1,000 biggest Chinese firms owed more in interest than they earned before tax. China requires more and more credit to generate less and less growth: it now takes nearly four yuan of new borrowing to generate one yuan of additional GDP, up from just over one yuan of credit before the financial crisis. With the government’s connivance, debt levels can probably keep climbing for a while, perhaps even for a few more years. But not for ever.
China is already the world's second largest economy, its debt capital markets are still largely closed, so that any "reorganisation" of its debt will be an internal problem...except China is still a big economy, and its unlikely that the shift will happen easily and without serious consequences.  What has killed Chinese governments in the past (we are talking of over 1,000 years of history) is popular unrest.  

The problem for china is not the flow but the stock of debt, I think that China's SOE have been avoiding the truth for so long that when "proper audit" is done it will be obvious that a large part of economic activity has absolute net negative contribution to the economy, and that, in fact, its not reducing the size of the companies (especially SOE) but shutting them down entirely.  This will produce a cascading effect on suppliers -- that will cause tremendous hardship across the economy and to areas that have nothing or little to do with the current imbalance.  

The risk therefore is multiplied by the worsening operating conditions, because once you are in the red and are surviving on the largesses of your lenders, you don't care anymore!  Joking aside, Japan has been hurting for nearly 30 years -- since the end of the economic growth model in December 1989.  It tried to soften the blow and "control" the correction.

So the economy that is its nearest rival (Japan), presents with a blueprint that it should not follow, the question is now that China knows the extent of the problem what will they do?

Enquiring minds want to know!



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