Friday, March 9, 2012

Why There Won't Be a Chinese Collapse.

If there is to be a cost this year to China's GDP, it's actually found in China's $1.7 trillion in local debt. 

That's the amount the central government rolled from banks onto local government balance sheets last February as a means of avoiding centralized default. 

But don't confuse that with a collapse. 

With a staggering $3.2 trillion in reserve, China has put away a tremendous amount of money for a rainy day. China can literally recapitalize its banking system several times over and have change left over.


On the other hand, we(USA) owe more than $211 trillion to ourselves according to CBO figures I've examined and which Boston University's Lawrence Kotlikoff has referenced with great fanfare. 

We could no more recapitalize our banking system than the man in the moon without cratering it or driving ourselves so far into debt we will never be able to pay it off--which ought to sound uncomfortably familiar.

Despite the dire warnings from noted China apocalypse theoreticians like avowed short seller Jim Chanos, China's property debt remains very conservative compared to the mess in our own system. There's very little if any of the securitization there that we have here.
This means Beijing can lower deposit costs and guarantee a comparatively wider spread between borrowing and lending rates. 

It is an option our government doesn't really have in practical terms, though that's what Team Bernanke's Zero Interest Rate Policy is intended to do.

Some suggest this is going to be like an imputed tax that kills growth because Chinese wage earners are going to have to subsidize the results of insolvency by making up the difference via the kind of wealth transfer we've seen here.

I'm not so sure that's the case in China - at least not immediately.

According to CLSA Asia-Pacific Markets, China's non-performing loans ratios remain near all-time historic lows. 



So don't let the $1.7 trillion figure scare you. Chances are it's not the boogey man everybody makes it out to be. China's Non-Performing Loan to loan ratio is under 1%.

What this means, in very practical terms, is that China actually has room for further fiscal and monetary easing. 



In fact, according to The Economist, which analyzed 27 emerging markets and ranked the countries in terms of inflation, excess credit, real interest rates, currency movements and current-account balances, China has a lotof room to ease if necessary.


Courtesy: http://moneymorning.com/2012/03/07/the-real-china-story-its-what-premier-wen-didnt-say-that-matters/

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