The Telegraph reports on what may be a very significant change of direction for the Chinese economy.
Nobody rings a bell at the top of the credit supercycle, to misuse an old adage. Except that this time somebody very powerful in China has done exactly that.
China watchers are still struggling to identify the author of an electrifying article in the People's Daily that declares war on debt and the "fantasy" of perpetual stimulus.
Written in a imperial tone, it commands China to break its addiction to credit and take its punishment before matters spiral out of control. If that means bankruptcies must run their course, so be it.
Fifteen years ago such a mystery article would have been an arcane matter, of interest only to Sinologists. Today it is neuralgic for the entire global - and over-globalized - financial system.
China's debt is approaching $30 trillion. The fresh credit alone created since 2007 is greater than the outstanding liabilities of the US, Japanese, German, and Indian commercial banking systems combined.
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To put matters in context, leverage rose by roughly 50 percentage points of GDP in Japan before the Nikkei bubble burst in 1990, or in Korea before the East Asia crisis in 1998, or in the US before the subprime debacle. This gauge is an almost mechanical indicator of a future credit crisis.
As we all know, China is in a class of its own. Debt has risen by 120 to 140 percentage points. The scale of excess industrial capacity - and China's power and life and death over commodity markets - mean that any serious policy pivot by the Communist Party would set off an international earthquake.
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The rot in the country's $7.7 trillion bond markets is metastasizing. Bo Zhuang from Trusted Sources said more than 100 firms cancelled or delayed bond issues in April due to widening credit spreads.
Ten companies have defaulted this year, with the shipbuilder Evergreen, Nanjing Yurun Foods, and the solar group Yingli Green Energy all in trouble this month. But what has really spooked markets is the suspension of nine bonds issued by the AA+ rated China Railways Materials, the first of the big central SOE's to signal default. "This has greatly weakened investors’ long-standing expectation of implicit government support," he said.
There's more at the link.
I can't emphasize too strongly the potential implications of this article. If it turns out to be from a source with the authority to make the new approach stick, it will have a dramatic ripple effect on the entire global economy. China (and the Asian market it dominates) now manufactures almost half of all the goods produced in the entire world. That, in turn, drives imports (of raw materials to China) and exports (of manufactured goods from China) around the globe. A severe contraction of that country's debt-fueled economy would put a very large proportion of that trade in immediate jeopardy, which would have instant effects on the economies of every other industrialized and developed nation.
I've written extensively about the problem of debt, and what it means for everything from national economies, through corporations, to individual consumers. It looks like someone high up in the Chinese government has 'seen the light', and is trying to act before it's too late. Trouble is, the debt problem there is already so immense that it may be too late for a 'soft landing'. I suspect we're about to find out.