China’s Debt Bubble: When Will The Ponzi Unravel?

6 Apr

From Naked Capitalism via Roubini Global Economics:

Independent Strategy’s latest report, “China’s credit bubble: the missing piece in the jigsaw” makes a persuasive case that China’s debt fueled growth model is due for a hard landing, but the timing is uncertain, since the debt is funded internally.

China is barely past an episode of dealing with banks chock full of bad loans (there were debates among Western analysts in 2002 and 2003 as to how bad the damage was and whether the remedies were sufficient). On a more fundamental level, China has copied the Japanese mercantilist development model pretty much wholesale. It arguably hit the wall with the 1985 Plaza accord, when the US found the continued trade deficits unacceptable and succeed in organizing a G5 intervention to drive up the yen (that succeeded too well, the yen overshot, leading to the Louvre accord to push up the greenback). Japan’s central bank lowered interest rates to stoke asset prices in the hopes that the wealth effect would produce higher domestic consumption and offset the effect of the fall in exports.

We all know how that movie ended…

The report forecasts a large decline in growth rates, as well as land and real estate prices, since LGFVs [Local Government Financing Vehicles] will need to liquidate holdings to try to pay off non-performing loans.

One Response to “China’s Debt Bubble: When Will The Ponzi Unravel?”

  1. Barry April 8, 2010 at 7:24 am #

    I must say, I admire your cut and paste abilities.

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