This is what I am very afraid of. Commodity bulls, watch out.
China’s bad loans could bust world economyThe risk of what Nobel laureate Paul Krugman calls “Japanification” – a semi-permanent economic funk – has haunted China for at least a couple years now. Last week a Bank of America Merrill Lynch report again asked: “Will China repeat Japan’s experience?”
Let’s dispense with the suspense: Yes, China very likely will. And the outcome will have far more serious global implications than the chances of stagnation in Europe. China’s “severely under-capitalised financial system”, “imbalanced growth” and chronic “overcapacity” all remind Merrill Lynch analysts Naoki Kamiyama and David Cui of Japan in 1992, when its bubble troubles first began to paralyse the economy. China is even more reliant on exports than Japan was in the 1990s, and its all-important property market now “may be tipping over”.
Most worrying is the shaky banking sector and the lack of bold action in Beijing when the scale of Chinese bad debt may be higher than Japan’s ever was; they believe non-performing loan ratios are “significantly into double digits”. In the first half, the analysts estimate, commercial banks had to book larger non-performing loan liabilities than for all of last year.
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The popular tonic is that China has $4 trillion of currency reserves to toss at its bad-loan problem. Yet any move to turn China’s US treasuries, European debt and Japanese bonds into cash could precipitate a global rout. A Chinese crash would hammer commodities markets, industries from manufacturing to hi-tech, and credit ratings of export-reliant economies from Australia to Japan to Brazil. It would be an untimely blow to the US and a fragile Europe.
