Saturday 7 December 2019

A Chinese economic crash could usher another global crisis

China's President Xi Jinping (front, centre) - in Brazil to attend the sixth summit of the BRICS - insists his country's financial reform process should not be subject to scrutiny by the rest of the world. Photo: EDILSON RODRIGUES/AFP/Getty Images
China's President Xi Jinping (front, centre) - in Brazil to attend the sixth summit of the BRICS - insists his country's financial reform process should not be subject to scrutiny by the rest of the world. Photo: EDILSON RODRIGUES/AFP/Getty Images
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William Pesek

Few moments in modern financial history were scarier than the week of September 15, 2008, when first Lehman Brothers and then American International Group collapsed.

Who could forget the cratering stock markets, panicky bailout negotiations, depressing job losses and decimated retirement accounts - not to mention the discouraging recovery since then?

Yet a Chinese crash might make 2008 look like a garden party. As the risks of one increase, it's worth exploring how it might look. GDP may have risen faster than expected in the second quarter at 7.5pc, but if China does experience a true credit crisis, it would be felt around the world.

Lehman and AIG were just two financial firms out of dozens. Opaque dealings and off-balance-sheet investment vehicles made it virtually impossible even for the managers of those companies to understand their vulnerabilities, and those of the broader financial system. The term "shadow banking system" soon became shorthand for potential instability and contagion risk in world markets.

Well, China is that and more. China surpassed Japan in 2011 in gross domestic product and it's gaining on the US.

Some World Bank researchers even think China is already on the verge of becoming number one, although I'm sceptical. China's world-trade weighting has doubled in the last decade. But the real explosion has been in the financial sector.

Since 2008, Chinese stock valuations surged from $1.8 trillion to $3.8 trillion and bank-balance sheets and the money supply jumped accordingly.

China's broad measure of money has surged by an incredible $12.5 trillion since 2008 to roughly match the US's monetary stock.

This enormous money build-up fed untold amounts of private-sector debt along with public-sector institutions. Its scale, speed and opacity are fuelling genuine concerns about a bad-loan meltdown in an economy that's 2.5 times bigger than Germany's. If that happens, at a minimum it would torch China's property markets and could take down systemically important parts of Hong Kong's banking system. The reverberations probably wouldn't stop there, and would hit resource-dependent Australia, batter trade-driven economies Japan, Singapore, South Korea and Taiwan and whack prices of everything from oil and steel to gold and corn.

Such risks belie President Xi Jinping's insistence that China's financial reform process is a domestic affair, subject neither to input nor scrutiny by the rest of the world. That's not the case.

Just like the Chinese pollution that darkens Asian skies and contributes to climate change, China's financial vulnerability is a global problem. As policy makers in Beijing generate even more credit to keep bubbles from bursting, the shadow banking system continues to grow.

The longer China delays its reckoning, the worst it might be for China - and perhaps the rest of us. (Bloomberg)

Irish Independent

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