Saturday, July 22, 2017

Has Chinese debt jumped the shark?

The latest version of John Mauldin's "Thoughts From The Frontline" contains a very enlightening section on the coming end game for the Chinese debt Ponzi:

Yellow highlights are mine.

Black Swan #3: Chinese Debt Meltdown
China is by all appearances unstoppable. GDP growth has slowed down to 6.9%, according to official numbers. The numbers are likely inflated, but the boom is still underway. Reasonable estimates from knowledgeable observers still have China growing at 4–5%, which, given China’s size, is rather remarkable. The problem lies in the debt fueling the growth.
Ambrose Evans-Pritchard reported some shocking numbers in his July 17 Telegraph column. A report from the People’s Bank of China showed off-balance-sheet lending far higher than previously thought and accelerating quickly. (Interestingly, the Chinese have made all of this quite public. And President Xi has taken control of publicizing it.)
The huge increase last year probably reflects efforts to jump-start growth following the 2015 downturn. Banks poured fuel on the fire, because letting it go out would have been even worse. But they can’t stoke that blaze indefinitely.
President Xi Jinping has been trying to dial back credit growth in the state-owned banks for some time; but in the shadow banks that Xi doesn’t control, credit is growing at an astoundingly high rate, far offsetting any minor cutbacks that Xi has made.
Here are a few more juicy quotes from Ambrose:
President Xi Jinping called for a hard-headed campaign to curb systemic risk and to flush out “zombie companies”, warning over the weekend that financial stability was a matter of urgent national security.
It is the first time that a Chinese leader has chaired the National Finance Work Conference – held every five years to thrash out long-term plans – and is a sign of rising concern as debt reaches 280pc of GDP.
In a move that will send shivers up the spines of local party officials, he said they will be held accountable for the rest of their lives for debts that go wrong. Any failure to identify and tackle risks will be deemed “malfeasance”.
Ambrose then quotes Patrick Chovanec of Silvercrest Asset Management:
“The banks have been selling products saying it isn’t our risk. Investors have been buying them saying it’s not our risk either. They all think the government will save everything. So what the markets are pricing is what they think is political risk, not economic risk,” he said.
A market in which “they all think the government will save everything” is generally not one you want to own – but China has been an exception. It won’t remain one forever. The collapse, when it comes, could be earthshaking."
_________________________ end Mauldin __________________

Well there you have it, the only condition that ever had a chance of killing the debt Ponzi: PERSONAL, INDIVIDUAL ACCOUNTABILITY.  That's right.  As long as actors can hide behind the granite exterior walls of an institution where crimes are handled simply by paying penalties  (bribes), corruption and greed are built into the business model.  And it is not just because all the players are evil bastards.  If you think about it, if the very system is corrupt then how you survive by being a nice guy.

The movie, "Hunger Games" was trying to teach us this lesson.  The system demanded tributes be put into the death match known as Hunger Games.  Failure to provide a tribute meant that many more deaths would occur at the hands of the overseers.  So regions would unhappily oblige and give up some of their young people to an almost certain death.

Once selected as a "tribute" for the games you have two choices: kill or be killed.  The nice and/or weak people died early.  The bad and or strong people tended to win.  This is where all global economic institutions are.  If they don't leverage up then someone else will and those chicks that grow the fastest kick their siblings out of the nest for the long fall and the hard landing.  

Is it really all that difficult to predict what will happen soon in the picture below??

This is what Chuck Prince was talking about with his "we're still dancing" comment while head of Citigroup precrash.  In a dishonest debt based money supply you either leverage up or you die at the hands of those who will.  At the same time, those who leverage up too far will eventually collapse and give it all back up.  It is a difficult game of surviving not only the upswings in credit creation but also the deflationary crashes that inevitably follow.

China's shadow bank debt has clearly gone through the roof and there would be no stopping it except for the new warning from the leadership that those who end up defaulting in the future will be held personally liable.  So at this point, those people can only expect to be treated very harshly in a public manner when the collapse comes.  At best they can spend the rest of their lives in jail.  At worst I could see China forming firing squads in order to appease the rank and file citizen who loses everything in the coming collapse, perhaps including the ability to eat on a daily basis.

Given this, it explains why there is such an exodus from China by their elite (accompanied by their money of course).  You will know that the end is very near when big names there begin to head to jail.  This of course has been happening to some degree since 2014.  You will know that the end is upon us when they are instead sent to firing squads.  That is when the Chinese hunger games will stop and when they do, look out below for more than just China.  Lack of unprofitable investments in order to feed American consumption means that prices in the US will go up dramatically.  Low cost consumption of quality made Chinese goods by Americans is only funded by debt.  First it is debt in China in order to produce things that cannot be sold at fair value and second it is debt in the USA to receive these goods without sending anything back of value - the dollars go back instead of trade goods.

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