Beware a Credit Fueled Economic Expansion

Beware a Credit Fueled Economic
Expansion
By www.ForexConspiracyReport.com

http://www.forexconspiracyreport.com/beware-a-credit-fueled-economic-expansion/
Moody’s investors service just
downgraded China’s credit rating from
Aa3 to A1.

Bloomberg notes that the last time
they downgraded Chinese debt was
after the Tiananmen Square
crackdown and just before the Berlin
wall fell.

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Before We Continue…

That was 1989 and today’s
gleaming financial center in
Shanghai was still a swamp.

Moody’s latest downgrade to A1 from
Aa3 Wednesday comes as President
Xi Jinping pushes China’s influence
around the world.

That was highlighted by this month’s
gathering of global leaders in Beijing
to celebrate a multi-billion dollar
infrastructure-building initiative along
the old Silk Road that Xi describes as
the “project of the century.”

China has since become an economic
colossus, contributing about one third
of global growth last year.

It’s on track to expand at an estimated
6.6 percent this year.

But it’s been a credit-fueled
expansion. And that’s what’s got
Moody’s worried.

The key to China’s success over the
last decades and the key to its current
problem is debt fueled growth.

Interestingly in 1989 Japan’s shot at
world economic domination fizzled out
when massive hidden loans came to
light.

Heavy debt led to a stagnating
economy in Japan for that last two
and a half decades.

Will China’s credit fueled expansion
end up the same way?

What’s Next?

Private debt in China was 100% of the
GDP in 2008 on the eve of the Great
Recession.

It is 150% of the GDP today. Banks in
the land of managed capitalism could
be in big trouble.

In fact, Business Insider suggests that
a massive bank bailout in China
may be necessary.

China’s leaders have identified the
containment of financial risks and
asset bubbles as a top priority this
year.

All the same, authorities are moving
cautiously to avoid knocking
economic growth, gingerly raising
short-term interest rates while
tightening regulatory supervision.

At the same time, Beijing’s need to
deliver on official growth targets is
likely to make the economy
increasingly reliant on stimulus,
Moody’s said.

“While ongoing progress on reforms is
likely to transform the economy and
financial system over time, it is not
likely to prevent a further material rise
in economy-wide debt, and the
consequent increase in contingent
liabilities for the government,” it said.

In order to continue to provide jobs
and maintain domestic tranquility
China will need to keep borrowing.

And that is would could take China
down Japan’s path and require bank
bailouts and more.

The Debt Addiction

The New York Times writes
that China’s debt addiction now
threatens its growth.

China has gone on a spending spree,
borrowing money to build cities,
create manufacturing giants and
nurture financial markets – money
that has helped drive the economic
powerhouse in recent years.

But the debt-fueled binge now
threatens to sap growth in the world’s
second largest economy.

With its economy maturing, China has
had to pile on ever more debt to keep
growth going briskly, a pace that could
prove unsustainable.

And the money is increasingly flowing
through opaque channels that operate
outside the regulated banking system,
leaving China vulnerable should those
hidden risks blow up.

The Times also notes that economists
are comparing China’s situation with
Japan’s at the end of the 80’s.

The problem for China is that
Communist Party maintains its control
of the country today as much by
driving economic growth and
providing jobs as it does by using
police state tactics.

The Communists running China don’t
want to lose their positions so it is
likely that borrowing and spending will
continue until the credit fueled
expansion is totally unsustainable.

Beware a Credit Fueled Economic Expansion

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Beware a Credit Fueled Economic Expansion