China Continues To Prop Up Its "Unpropable" Economy

China's Debt Soared After 2008 (click to enlarge)

Near the end of 2017, Zhou Xiaochuan, the governor of the People’s Bank (PBOC), spoke of “fierce market reactions” and a possible Minsky Moment, the tipping point when credit cycles break and euphoric booms collapse under their own weight. Mr. Zhou told China Daily that asset speculation and property bubbles could pose a “systemic financial risk” made worse by the plethora of wealth management products, trusts, and off-books lending taking place throughout the country. Today China continues to prop up the unpropable, and yes, while no such word exists, when it comes to China's economy it should, for "unpropable" describes the financial collapse that can only be postponed but not stopped.

A recent article published by ZeroHedge contends that in the brief period since the financial crisis Chinese bank assets, and by implication liabilities, have exploded by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined and that today China's debt has become the biggest wildcard for the stability of the global financial system. Continuing along this "one-way path," in January, Beijing injected a staggering $685 billion in new credit into its financial system, greater than the GDP of the 21st largest country, Taiwan.

Many of us are drawn to a good illusion and in some ways, it could be said that our culture has become obsessed with avoiding what is real. With this in mind, we must remember that politicians and those in power tend to go to extreme efforts to avoid taking responsibility for the problems they create. History shows that one way a country can kick their gross domestic product higher is to build a false economy based on infrastructure or war. China's version of this is apparent in its "ghost cities" but when a country gorges at the trough of deficit spending that generates a big temporary boost in its GDP it also quickly creates a wall of debt. One of the best examples of building an economy on a foundation of military might or a massive move to militarization was demonstrated by how Germany was turned into a war machine during the 1930s.

China watchers, economists, and investors have been forming battle-lines for years as they debate the true strength and sustainability of China's economy and its role as a global player. Those of us that paint a picture of future collapse and a day of reckoning are often accused of spreading "doom-porn" when we claim that the Chinese have masked over their dire situation by continually expanding credit. It is important to note that over the years each new wave of money has begun to lose its impact as the efficiency of stimulus waned and more and more of the credit was absorbed in supporting existing debt. The fact is few good investment opportunities currently exist in China which has caused more and more money to leak across the border inflating asset bubbles in other countries.

 China Is A Small Player (click to enlarge)

Much of what is occurring in global currency markets is getting scrubbed away by our complex financial system that tends to soften the edges of any harsh move until it can no longer be hidden. This may seem wildly unlikely to many people that think such things move and unfold in a logical way but viewing the currency market as a manipulated scheme by central banks to create the illusion of stability makes sense. For a long time, I have maintained the view that currencies are trading in a false paradigm created by the coordinated collusion of the major central banks which busy themselves sheltering currencies from a storm of volatility. The central banks know a strong hint of weakness in any of the world's four major reserve currencies could destroy the myth that major currencies are immune to the same fate that has haunted so many currencies throughout history.

It is important to understand that in our modern world wealth is mostly contained within a rather closed system.system of fiat money which includes laws and rules that by their nature discourage freedom of movement into tangible assets. History shows that when the nations granting a currency have proven unable to control their budgets and are crushed under the weight of debt bad things happen. The rubber will meet the road as more countries that export to China begin to solidly question the value of the Chinese currency and demand payment in another form. The rumors we hear of central banks and countries buying gold may be the canary in the coal mine and a warning that investors should get ready for a rude awakening because we are about to see a huge shift in wealth due to changes in currency values.

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