"The concern of Cui and others is that the Chaori default will be the tip-off point for an unravelling of China's financial system. The default could wake investors and bankers to the realization that companies they thought were safe bets are potentially not, and they could begin to reassess other loans and investments to other corporations. In other words, they might start redefining what is and is not risky. That could then lead to a credit crunch, when nervous bankers become wary of lending money, or lending at affordable interest rates. More bankruptcies could result. That eventually causes the financial markets to lock up -- and we end up transitioning from a Bear Stearns moment to a Lehman Brothers moment, when the financial sector melts down. 'We think the chain reaction will probably start,' Cui wrote. 'In the U.S., it took about a year to reach the Lehman stage when the market panicked ... We assess that it may take less time in China.'"
The Financial Post reported in January:
"The U.S. and Europe learned the hard way about the dangers of shadow banks in the financial crisis but, five years later, China appears set to get its own painful lesson about what can happen when large capital flows get diverted to unregulated corners of the financial system.
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"'We estimate that 88% of the revenues of Chinese trust companies is at risk in the long term,' said McKinsey and Ping An.
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"Billionaire investor George Soros recently wrote on a popular news website that the impending default and the growing fear reflected in Chinese markets has 'eerie resemblances' to the global crisis of 2008.'"
The big picture: the $23 trillion dollar Chinese credit bubble is starting to collapse.
As Michael Snyder wrote in January:
"It could be a 'Lehman Brothers moment' for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion. That is an increase of $14 trillion in just a little bit more than 5 years. Much of that 'hot money' has flowed into stocks, bonds and real estate in the United States. So what do you think is going to happen when that bubble collapses?
"The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen. Never before has so much private debt been accumulated in such a short period of time. [Note: Private debt is much more dangerous than public debt.] All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads. In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014."
As the Telegraph pointed out a while back, the Chinese have essentially "replicated the entire U.S. commercial banking system" in just five years... Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire U.S. commercial banking system in five years," Charlene Chu, the agency's senior director in Beijing, said.
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," she said.
As with all other things in the financial world, what goes up must eventually come down.
The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China.
According to Forbes, M2 in China increased by 13.6 percent last year...
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