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NY Times: China in 'Biggest Borrowing Binge' in History

NY Times: China in 'Biggest Borrowing Binge' in History

(Dollar Photo Club)

By    |   Thursday, 08 September 2016 10:07 AM

China is in the midst of one of the biggest borrowing binges in history, which is eerily similar to that of the United States before the 2008 financial crisis.

China’s pile of public and private debt soared to $26.6 trillion in 2015, “about five times what it was a decade ago, and more than two and a half times the size of the country’s entire economy,” the New York Times reported.

The surge has pushed some economists and admired investors such as George Soros to compare China to the United States before the 2008 financial crisis.

The delicate walk along a financial tightrope also has many on edge about what such trouble for the world's second biggest economy could mean for the rest of the globe.

“The traditional view is that rapidly rising debt eventually leads to an economic crisis. That can happen in several ways. In Greece, the culprit was the government, which built up more debt than it could handle. In the United States, the risks lurked in the finances of banks and households,” the Times reported.

“In the case of China, the problem is primarily in the corporate sector. China’s big companies — especially those owned by the state — have done much of the borrowing. Higher debt means companies will have to spend more on interest and paying it back, and less on investing and hiring,” the Times reported.

“That is where a vicious cycle could come in. Less spending on investing and hiring hurts the overall economy, hitting corporate bottom lines and making it even harder for companies to pay off debt. Bad loans rise. Banks freeze lending. Confidence in the financial system can be shaken, leading to a full-fledged banking crisis.”  

Meanwhile, getting clear and clean facts about the situation is difficult, at best.

"The problem could be bigger still because the frantic pace of new lending makes it hard to know how many loans aren't being repaid," Bloomberg reported. "Regulatory loopholes, banks' off-balance-sheet portfolios of wealth management products (likened by some to Western lenders' exposures in the subprime crisis), and widespread shadow banking practices further complicate the picture — as does a system of implicit guarantees that obscures how much of the debt is backed by the government or who would be allowed to go bust."

Optimists argue that "concerns about China's debt are overblown; companies and local governments can simply grow their way out of the problem as an expanding economy supports borrowers and creates inflation, which erodes the burden of debt repayments," Bloomberg recently reported. "Pessimists say the problem is not self-correcting. They expect policy makers to tackle nonperforming loans and stave off defaults."

However, the situation is triggering official warnings. The International Monetary Fund recently said China needed to slow its unsustainable credit growth and stop financing weak firms.

"China's corporate debt is still manageable, but at approximately 145 percent of GDP, it is high by any measure," said James Daniel, IMF Mission Chief for China, in the fund's annual review of the country.

The IMF has urged China to tackle the root causes of its credit growth risk by easing back on unsustainably high growth targets and lax budget constraints, particularly on local governments and state-owned enterprises, Reuters reported. "This in turn requires a comprehensive strategy and decisive measures to address the corporate debt problem," the IMF's Daniel said.

To be sure, Bloomberg View columnist Christopher Balding also warned that China's public finances are in worse shape than many realize, and "mounting bad debts, double-digit deficits and a rickety financial system" make for a volatile combination.

"The old playbook isn't working anymore," he recently wrote. "If China's credit can't expand forever, it must stop -- either by choice or by force."

(Newsmax wire services contributed to this report).

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China is in the midst of one of the biggest borrowing binges in history, which is eerily similar to that of the United States before the 2008 financial crisis.
china, borrow, binge, biggest
Thursday, 08 September 2016 10:07 AM
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