The Phaserl


China’s Banking Crisis Looms Like Banquo’s Ghost in Davos

China is trapped. The more it burns through foreign reserves to defend the currency, the more it tightens domestic credit

by Ambrose Evans-Pritchard, The Telegraph:

Bad debts in the Chinese banking system are four or five times higher than officially admitted and pose a mounting risk to the country’s financial stability, the world’s leading expert on debt has warned. Harvard professor Ken Rogoff said China is the last big domino to fall as the global “debt supercycle” unwinds. This is likely to expose the sheer scale of malinvestment that has built up during the country’s $26 trillion credit bubble.

Prof Rogoff said the official 1.5pc rate of non-performing loans held by banks is fictitious. “People believe that as much as they believe the GDP data,” he told the World Economic Forum in Davos.

The real figure is between 6pc and 8pc. He warned that unexpected problems can come “jumping out of the woodwork” once a debt denouement unfolds in earnest.

Banks are disguising the damage by rolling over bad loans and pretending all is well, with the collusion of regulators, but this draws out the agony and ultimately furs up the financial arteries.

Ray Dalio, founder of Bridgewater, said the worry is that credit in China is still growing faster than the economy even at this late stage, storing up greater problems down the road. The efficiency of credit has collapsed. It now takes four yuan of extra debt to generate a single yuan of economic growth, compared to a ratio of almost one to one a decade ago.

China’s foreign reserves have dropped by $700bn to $3.3 trillion as capital flight overwhelms the inflows from the country’s trade surplus. Mr Dalio said the historical pattern is that falls of this magnitude are typically followed by 25pc devaluation.

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