China Showing Some Cracks

What’s happening in China? The interbank market succumbed to two panic attacks, on June 7th and last week, immediately doused by monetary injections from the central bank, the People's Bank of China, but tensions remain. Two big commercial banks, ICBC and Bank of China, have had their online services cut for some hours, so rumours abound and there is more and more talk of a banking crisis...

In fact, China is trying to get itself out of a gigantic credit bubble. According to Fitch, for the last five years, the credit/GDP ratio has gone from 75% to 200%, a never-seen progression on the planet. In response to the 2008 crisis and to avoid a collapse of production, the Chinese authorities vigorously intervened in the credit market in order to sustain real estate construction and infrastructures. Where did this lead to? To many unproductive investments (whole parts or entire cities are empty, like in Spain). In other words, growth is falling, but this debt has to be repaid!

Credit is so off its tracks that an officious market has taken place : large companies that have easy access to credit are borrowing, not to invest but to lend to smaller companies. This is a dangerous behavior, which is typical of a bubble.

The People's Bank of China wants to stop this never-ending race and, of course, certain cracks are appearing. Credit must be restrained while the banking system must be cleansed, and this has to be done without having the real estate bubble explode... quite a feat! Even if, as we’ve explained recently, China is virtuously buying large quantities of gold, this will not be enough to face this mountain of existing debt.

China is confronted to the same problems that Japan, the US and Europe are facing, i.e. how to get out of laxist monetary policies that have proven their inefficiency (no recovery), while avoiding a crash... is it possible? We can certainly doubt it, given the massive accumulated debt, numerous bubbles, murky banks balance sheets, and the amount of bad investments. All around the world, stock markets are trembling at the mere talk of a possible tapering of the rythm of the money printing. They have become entirely dependant on the central banks’ monetary injections, not taking into account any real factors.

But, in the case of China, we must add the problems of lack of transparency, strict government control of information, untrustworthy public accounting, incestuous relationships between large corporations and the government, and a GDP growth rate which is more akin to propaganda than to an objective measure. There’s nothing we can see. We can only perceive the symptoms, like these liquidity crises on the interbank market. The State controls everything, thus it has more possibilities of manipulation, but the day it will have to let go, we’ll be expecting some mighty shocks.