China – The trigger for a crisis?

A chart in the latest IMF Global Financial Stability Report raises an important question: is the Chinese economy taking on so much debt that it is vulnerable to a crash? As you can see past crises have been triggered at similar debt to GDP ratios.

The IMF team comments: “China faces mounting risks to financial stability as credit continues to rise rapidly. China’s bank assets are now more than triple its GDP, and other nonbank financial institutions also have heightened credit exposure. Many financial institutions continue to be overly dependent on wholesale financing, with sizable asset/liability mismatches and elevated liquidity and credit risks. Recent turbulence in money markets illustrates the vulnerabilities that remain in China’s increasingly large, opaque, and interconnected system.”

The Chinese government are aware of the problem, but are caught in a dilemma. If they change course and try to reduce debt levels they could bring on a recession.

Property

One sector in particular is causing concern: Much like Japan in the 1980s China has rapid house price growth. When the Japanese bubble burst in the early 1990s public confidence disappeared, corporations held back investment, GDP fell and the stock market halved.

Currently China supplies 40% of world GDP growth. If it had a recession, and……………………..To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

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