The Chinese debt bomb has been a long time in the making and is getting ready to explode. For some, the reaction is, “So what? The borrowers are not defaulting and the government has plenty of money to bail them out if they do. What’s the worry?”
First of all, the defaults are beginning to pile up. Several large corporations and regional governments have defaulted recently. Second, China does have huge reserves but needs those to defend the yuan and bail out the banking system. There’s not much left over to bail out the corporate, individual and real estate sectors as well.
China’s leadership did begin a deleveraging campaign last year to get the situation under control. But the economy began a dramatic slowdown as soon as the credit spigot was turned off. Now, as this article reports, China’s leaders have panicked at the slowdown and have started the credit flow again with lower interest rates, higher bank leverage and more debt-financed, government-directed infrastructure spending.
Of course, all this does is postpone the day of reckoning and make the debt crisis worse when it does arrive. China is at the crux right now. The economy is slowing, debt is exploding and the trade war with Trump has hurt China’s exports needed to earn dollars to pay the debts.
The countdown to a Chinese debt crisis has begun. When the crisis strikes in full force, possibly in 2019, the rest of the world will not be spared.
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