The China Credit Crisis

NEW YORK (TheStreet) -- China has the largest credit bubble in the world.

We have tracked the private sector credit in China for the past several years. It's a parabolic curve, and as market observers know, parabolic moves eventually collapse.

My e-book, "The Coming China Crisis" (150 pages), one year ago predicted a crisis. It was greeted with great disbelief, similar to our book written in 2007, "Prelude to Meltdown," which predicted that 2008 would see a potential meltdown in the U.S. system. Very few people believed it and the financial media ignored it. But now it has surfaced.

This month, on June 20, the global markets were shaken by the big overnight surge in short-term interest rates in China. The Shibor rate (similar to the short-term Libor interest rate in the western world) soared to over 11% overnight. The overnight repo rate soared over 25%.

The Chinese news media said this is intentional action by the government to crush the out-of-control shadow banking system. I don't believe that. It seems more like things have gone out of control and they don't want to acknowledge it. So they say, "We did it on purpose."

The global stock and commodity markets tumbled. Analysts in the U.S. quickly blamed Federal Reserve Chairman Ben Bernanke's statements on May 22, although he said nothing new. In fact, he even said that there is no time limit on the current stimulus of $85 billion and, if conditions require it, it would continue. Most analysts are looking in the wrong direction. Interestingly, the president of the Fed of Minneapolis, confirmed on June 28 on CNBC that "the markets had it wrong."

Our work says that the highly leveraged trading outfits like hedge funds were caught by surprise with the events out of China. On that day, the DJI plunged around 350 points, gold lost around $100, closing below the critical 1300 support level, and bonds plunged as well. The highly leveraged trading operations were selling anything that had a bid in order to raise cash.

My view is that a China crisis would infect the entire globe. And that is what we have been writing for the past 18 months. No one will be immune.