China-Proof Your Portfolio Now, Before Sino Debt Hits the Fan
China’s total bank debt has grown from $14 trillion in 2008 to $25 trillion today -- more than double the total size of the U.S. commercial banking sector. To support this massive growth in credit, China’s central bank has more than doubled its cash supply by printing more money.
While this may have softened the blow of the 2008 financial crisis, history has never seen such a colossal ramp-up of both money and credit without a subsequent period of financial chaos.
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Moreover, that new money was borrowed primarily by state-owned businesses and municipalities -- entities that are not focused on economic profit, but rather on driving employment and meeting the growth targets tied to the nation’s Communist legacy. (For a more in-depth study of the subject, I recommend James Rickards’ book The Death of Money: The Coming Collapse of the International Monetary System.)
In 2008, U.S. investors could point to one clear moment when financial institutions’ absurdly levered balance sheets exploded into global disaster: September 15, 2008, when Lehman Brothers declared bankruptcy.
In watching for signs of a crisis in China, however, investors should expect no such clarity. In fact, as China’s growth is slowing, and labor costs are rising, the situation is more analogous to the frog in a pot of water that is slowly heating up.
Investors will need to be closely attuned to particular signals that could indicate oncoming trouble, since the country’s leadership would likely try to keep a crisis out of view for as long as possible.
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One sign could be an announcement by the central government of higher GDP growth targets. In China, doubling down on growth -- in effect, a much larger and systemic stimulus package than the one the Obama administration introduced post-2008-- would likely indicate that the problem of bad loans has grown so widespread that the only hope for repayment is to artificially drive up domestic demand as a means of soaking up excess capacity and potentially “inflating away” regional and corporate debt burdens.