Wednesday, 27 February 2013

“China Has Its Own Debt Bomb” [updated]

This excerpt from the Wall Street Journal was sent to me by a reader with the comment, “This is very telling”:

China Has Its Own Debt Bomb”: … Even if China dodges a financial crisis, then, it is not likely to dodge a slowdown in its increasingly debt-clogged economy. Through 2007, creating a dollar of economic growth in China required just over a dollar of debt. Since then it has taken three dollars of debt to generate a dollar of growth. This is what you normally see in the late stages of a credit binge, as more debt goes to increasingly less productive investments. In China, exports and manufacturing are slowing as more money flows into real-estate speculation. About a third of the bank loans in China are now for real estate, or are backed by real estate, roughly similar to U.S. levels in 2007...

“And how much of this is "sunk" in inflated land prices?” asks my correspondent.  Probably a fair proportion, would be my answer—perhaps because in China, even more than elsewhere, more savings are held in property as property is one of the chief ways in which savings are thought to be secure.  Just one reason so much Chinese money is finding its way into NZ real estate.

Which means the Chinese credit bubble is also our own credit bubble.

UPDATE: “As Goes China, So Goes The World And Definitely Australia

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