The largest holder of U.S. Treasury debt is the People’s Republic of China. The Obama administration — joined by the free-spending Bush administration — has run up quite a tab with the autocratic rulers of our Pacific rival.
But now Gordon Chang reports in Forbes that a major Chinese bank is in line for a “mega default” that could affect the entire Chinese economy.
Since the Chinese are essentially loaning the Obama administration the money he spends at such a profligate rate, it’s natural to assume the Chinese are shrewd domestic money managers able to generate the surplus they invest in U.S. treasury notes.
But that’s not the case. To generate the domestic growth that underpins the Chinese economy the country’s autocratic leaders are lending to their own borrowers like a drunken sailor buying drinks on the house.
Last year China’s money supply expanded by 13.6 percent, which Chang describes as a “credit addiction.” As a result this money is chasing increasingly risky loans, which reminds me of the U.S. housing bubble that crashed our economy in 2008.
The bad loan in question is one the Industrial and Commercial Bank of China — the largest in the world judging by its assets — based on an investment vehicle that depended on money invested in an unlisted company, always a bad sign for investors.
The Shanxi Zhenfu Energy Group was paying an estimated 12 percent interest on the money so the bank could promise investors a return of 10 percent. That return is three times what Chinese investors get on bank deposits and about 10 times what U.S. investors get from the bank.
Naturally Zhenfu couldn’t keep up and went bankrupt. In turn the Industrial and Commercial Bank says it will not make investors whole. In the past Chinese leaders have simply ordered banks to cover losses — a power I guarantee our own junior autocrat in the White House wishes he had.
As a result, the last time China experienced a contraction in Gross Domestic Product Mao Zedong was being fitted for his funeral suit. But ordering banks to cover losses didn’t cure the underlying problem; it only put another bolt on the lid of the economic pressure cooker. It does nothing to reduce the pressure.
China may soon reach the point where orders from headquarters will not be enough to prevent a default. And when that happens their economy will enter a period of freefall, because a house of cards has no internal structure. The bad news for us is when that domino falls it will ripple right across the Pacific and won’t stop until it reaches the White House.
When President Obama’s largest creditor can no longer lend money the carousel will come to a sudden halt, along with government spending. And on that day our economy enters uncharted and dangerous waters.
Michael Reagan is the son of President Ronald Reagan. He is president of The Reagan Legacy Foundation and chairman of the League of American Voters. Mike is an in-demand speaker with Premiere. Read more reports from Michael Reagan — Go Here Now.
© Mike Reagan