This is the best article I came across why a serious debt meltdown may already be in the making.
China Is Headed for a Debt Meltdown Like the U.S. in 2008 -- But WorsePosted:
01/08/2016 6:55 pm EST
World attention has focused in recent months on an acute refugee crisis occasioned by the mass migration to Europe of hundreds of thousands now fleeing the Syrian civil war. Less noticed has been another refugee crisis at least as ominous as that underway in the Middle East and Europe -- the fleeing of money from China.
What's going on, and why is it ominous?To understand what is happening, we must first remind ourselves what happened in the U.S. and global economies in 2008 -- and how China responded to it.
In 2008, the U.S. experienced the precipitous crash of what had been a highly overvalued real estate and associated bond market. Those markets' prices had been driven by cheap credit used by investors to speculate in residential real estate and mortgage-related financial instruments. Because these investments had been financed by private debt, post-crash investors found themselves suddenly owing much more than they owned -- their assets had plummeted, but the debts that they had incurred to buy them had not.
What China ultimately did was essentially, and ironically, to repeat what the U.S. had done in the first place -- it engineered two domestic asset price bubbles of its own.
When investors, post-crash, find themselves suddenly "underwater" like this, they tend to stop spending on goods and services in the "real" economy. After all, they now have negative net worth, and must accordingly spend larger portions of their incomes paying down debt rather than buying things.
When millions act pursuant to this dynamic, it slows or reverses macroeconomic growth -- it brings recession or all-out depression. The worst such episodes are called "debt-deflations," precisely because the falling prices and contraction experienced by an afflicted macroeconomy are driven by high ratios of private debt to income.
Back now to China. The U.S. debt-deflation that began in late 2008 infected the wider world economy. This was partly because foreign investors had also participated in the U.S. bubble, but it was also because U.S. consumers are primary sources of demand for other nations' products. China, in particular, depended on U.S. consumers to buy its products and thus fuel its growth.
China, then, was especially vulnerable to the contagion effects of America's post-2008 debt deflation. But China's government, as is well known, depends on delivering high domestic growth for its very legitimacy in the eyes of the citizenry. What, then, was China to do?
Chinese investors now find themselves faced with a post-bubble negative net worth problem, just like that faced by Americans after 1929 and 2008.
What China ultimately did was essentially, and ironically, to repeat what the U.S. had done in the first place -- it engineered two domestic asset price bubbles of its own. First it targeted real estate, directing state-owned banks to extend credit on cheap terms for speculative residential and commercial real estate investments. Then it targeted stocks and other financial instruments, allowing and then encouraging lenders to facilitate purchases of speculative assets on margin.
For five or six years, China's strategy worked. Steadily rising stock and real estate prices underwrote a "wealth effect," making China's wealthier and middle classes feel prosperous and thereby encouraging domestic spending. That in turn substituted for dwindling American and global demand for Chinese exports, keeping China's growth engine running -- for a time. Things were just as they'd been in the U.S. during the late Clinton and Bush years -- private debt fueled ephemeral macroeconomic growth.
In the end, though, the same thing happened to this bubble as happens to all bubbles -- it reached an outer limit, then began to deflate. The deflationary pressure in turn became self-accelerating, just as occurred in the U.S. in 1929 and 2008, and just as occurs in all "runs" on banks or assets.
Chinese investors now find themselves faced with a post-bubble negative net worth problem, just like that faced by Americans after 1929 and 2008.
Exodus of Currency
That takes us to China's new "refugee problem" -- the exodus of currency from its markets. What is now happening is that people are selling off Chinese assets and investing instead in (primarily) American assets -- including stocks but especially real estate. As momentum in these flows builds up, China faces the prospect of full-on meltdowns in its stock and real estate markets, just as occurred here in the U.S. in the late 1920s and post-2008 -- only worse.
Worse? Yes, and that takes us on to why China's travails are so ominous.
So, to begin, China's aggregate private debt-to-GDP ratios during its recent peak bubble years are much higher than in the U.S. -- both in 1928 and 2007
If its stock and real estate markets completely melt down, then, China's negative net worth problem and associated debt-deflation -- its "great depression" -- could well make our own look like festive occasions.
That is, of course, ominous enough, but there is more. Note first what I said earlier about where Chinese money is going -- to U.S. real estate and other asset markets. This, too, is worrisome, in at least two ways.
Read More:
http://www.huffingtonpost.com/robert-hockett-/china-debt-meltdown-_b_8940382.htmlJust read an article a couple weeks ago where China is dumping, at cheap rates, there excess steel into the American market. US steel companies are beginning to suffer, which will have a trickle down effect from this and this is only one segment yet large enough of an impact to be written about solely in the news. Scrap prices are very low, softening that market as well. I wonder if this will be another fiasco like the "Sheetrock" when China dumped a bunch of crap Sheetrock into the US market that made so many people sick and cost tons of money to replace?! You all remember the FEMA houses? Rows and rows of inhabitable homes because of China Sheetrock?? Sickened me to think "we" our government would not even use "in house", American made products which would have met the safety standards. One has to wonder when structural materials roll in off the boats if they comply with any safety standards, but we seem to gobble inferior products up each and every day without batting an eye. And, as Alan has stated many time, this is just one more segment. I believe there will be so many more cards to fall and we are just seeing the beginning. China's growth rate has, I believe, come to an unsustainable point in time, which economists have been predicting. So not only is it the cash flow that Alan talked about it is directly impacting their manufacturing which goes right hand in had with the cash flow.
