China's amazing GDP growth and recovery experienced since the 2008 - 2009 crisis is slowing down. The rate of growth continues on a downward trajectory, as more economic problems begins to emerge that are accelerating its slowdown for the economy and global growth. These problems have been building for some time now and many of the problems now faced by China have stemmed from the economic policy decisions that the Government implemented to fight off the last crisis.
How Did China's Economic Problems Start?
China's economic recovery from the 2008 crisis has been remarkable as the country was able to quickly adapt to the global challenges that swept through and effected its own economy. China was able to shift the focus temporarily away from exports, to their own domestic economy as they began to accelerate spending on fixed asset expenditure on various large infrastructure projects around the country. This was funded by lowering interest rates and accelerating the use of debt to spur their own economic recovery. By implementing this strategy it also spurred demand for overall consumer spending as more credit began to flow through their economy.
This strategy worked very well and within a short period of time the flow of credit and spending began to shift the growth of China's economy higher once again. As a result, it lifted the global economy higher as China grew imports to fuel its large fixed investment expenditure projects and increased consumer spending. This allowed many commodity based countries like Canada, Brazil, US and Australia among others to bounce back quickly from the 2008 economic crisis. The increase growth in consumer spending in China also facilitated countries with a large manufacturing base like the EU region to also return to growth.
As a direct result of China's return to strong GDP growth, global foreign capital investment in China soared, as investors were attracted by the growth rates.
So why does China have some many problems effecting its economy in 2017?
One of the main causes is because China's economic recovery was predominately achieved by utilizing record amounts of debt to stimulate demand and now the debt load is becoming an anchor to their economy. (See chart below)
Before the 2008 / 2009 crisis, debt to GDP in China was moving sideways at around 130%, as new debt growth offset new growth in GDP. After the crisis hit the debt to GDP skyrocketed, meaning the new debt was no longer having the same effect on demand and GDP growth like it did prior to 2008 - 2009 crisis. The probably cause for the shift in effectiveness on GDP growth after the crisis, was due to increased debt towards inefficient projects designed only to spur immediate demand regardless if the projects were financially viable.
Since demand now has been effected by the debt levels of mostly inefficient debt accumulation, it began to hamper growth and the economy began to slow after a few short years.
Now that the economy slow down is accelerating, the capital that came from abroad during the China growth recovery, together with domestic savings of China's citizens is fleeing China, in search of new growth opportunities in other countries.
The capital flight of over $1.2 trillion since 2015, is impacting on China's financial system and its currency the Yuan as financial conditions have tightened. This has impacted demand in China as access to credit becomes more difficult. This in turn spurs more demand for capital to find a new home globally as the currency becomes weaker as well as growth.
How Are The Economic Problems Impacting China's Growth?
Real Household Disposable Income Growth Falling
Prior to 2008 - 2009 crisis, China's real household disposable income was growing above 10% (See chart below). It reached a temporary high of 14% y/y on growth just after the crisis took hold as the stimulus spurred growth and incomes for a short period. After the crisis was in full swing the real household disposable income slowed to 6-7 % growth.
After peaking in 2012 income continued to decrease, as it made its way to just above 4% growth in real household disposable income in 2015. A level of growth that was considerable lower than the trough reached in 2009.
Since the new debt that flowed into the economy during the recovery was not introduced in an efficient way, the increased debt provided only a short term spike in growth rates. This most likely caused the slow down in real household disposable income growth as the debt began to wane on overall demand rather than expanding it.
China's Capital Flight Explained
The flow of capital leaving the country has been accelerating in late 2016 and 2017. This short video below explains why the rush of capital out of China is occurring.
China Tries To Stem The Capital Flight Problem
Since record amounts of capital is continuing to leave China each month it has placed an enormous amount of pressure on the financial system, as the outflow pressure is tightening financial conditions and liquidity within China. To tackle the tightening conditions, the Chinese Government has been adding massive amounts of liquidity that spiked in 2016 to attempt to stem the pressure. While they continue to add billions in liquidity the People's Bank Of China (PBOC) have had to sell their foreign reserves assets to fund their liquidity injections and support the currency.
The Outflow Pressure Continues In 2017
The chart below highlights the fact that China continues to struggle with managing their financial conditions as their financial system has once again required a surge of liquidity injections to ease the tightening conditions. Over the 5 day period from the 16th to the 20th January 2017, the PBOC had pumped in $1,130 billion Yuan into the system.
Without these injections the banks would face a cash crunch and the whole system would seize up and their economy would go from slowing growth to a crash in GDP.
Defending The Yuan To Slow Capital Flight
The existing policy of China is to have an orderly and planned depreciation of the Yuan currency relative to the US dollar, in order to keep their export driven economy competitive internationally.
However, as the capital flight began to increase in reaction to the Government decision to devalue the Yuan by larger amounts in August 2015, the currency has become more volatile on the market as the Yuan began to depreciate at a faster rate to what the Government had planned. To reduce the pace of devaluation, the PBOC has been actively supporting the Yuan by selling their foreign US dollar reserves to allow the Yuan to appreciate and offset the selling demand from capital leaving the country. By engaging in continuous support of Yuan they have depleted their reserves of US dollars by over $800 billion to support the Yuan.
Depleting Foreign Exchange Reserves
Since the Yuan is pegged to the US dollar, with a small allowance for market swings from the set daily spot rate, the Chinese Government has created another problem as it tries to control their currency devaluation to spur exports. The PBOC is rapidly depleting its reserves to control Yuan currency market. With the current pace of depletion of reserves the PBOC will run out of foreign reserves in only a few years time. So their current strategy to control the exodus of capital leaving their country by actively intervening in their currency is running out of money and time.
This is why the calls from economists around the globe to allow their currency to be fully floated rather than be pegged is growing. This will allow the PBOC to retain their reserves as they no longer need to intervene. The downside is that the reaction from the market from a free floating dollar is that the currency will most likely experience a sharp fall once floated, compounding the problems for China.
Chinese Citizens Buy Bitcoin To Protect From Devaluation Of The Yuan
The Chinese people are fully aware of the Governments plans for a continued devaluation of the Yuan as one of the economic policies to spur GDP growth for China. This has led to Chinese citizens sending large amounts of their capital in 2014 & 2015 overseas to purchase foreign assets like real estate in Vancouver, Sydney and New York to protect themselves from devaluation. To combat this the Government has implemented stricter capital controls to slow the capital flight by limiting the annual limit of capital leaving China to $USD 50,000 which is one of the many recent capital controls put in place by the Government.
To get around the capital controls the Chinese citizens have had to become creative and finds new ways around the capital controls. One of the big trend in 2016 to get around the capital controls, was to buy Bitcoin in China. When they want to sell their Bitcoin investment, they sell on a foreign Bitcoin exchange rather than the Chinese exchange meaning their capital is now outside of China.
This strategy became very popular last year and was one of the main reasons why Bitcoin was the best performing currency in 2016 with an approximate 100% return priced in Yuan / Rmb currency. (See chart below)
If the Government decided to also crack down on the use of Bitcoin as part of their capital controls, we could see a sizeable correction in the price of Bitcoin in 2017.
Global Economy Slowing As Trade Volumes Show Anemic Growth
Global trade volumes are barely growing and have been experiencing anemic growth since 2012. (See chart below). Like many of the charts shown in this article, there was a spike in volumes in 2010 as stimulus measures impacted on trade volumes as they spiked to just under 20% growth. After the stimulus waned the growth rates collapsed as well and now are barely growing.
Since China is a major trading partner with most countries the trade volumes growth doesn't bode well for its exports. Together with China's other economic problems, China will struggle with its GDP targets for 2017 due to its export weakness. This is especially true as it appears that the low growth in volumes is slowly heading towards 0% growth.
Global Export Values Slowing
The global trade values show a similar picture to the trends experienced with trade volumes globally. After experiencing a sizeable correction in trade values in 2009, global trade was able to rebound and make new highs. However since 2010 - 2011 the global trade values have been trending sideways, with the last 2 years showing that global trade values have been steadily falling.
China's Growth Engine - Exports Records Worse Slump Since 2009
Recent data released last week showed that China's exports recorded its biggest fall in exports since the 2009 slump. Exports actually declined by 7.7% in 2016, while China's imports also slowed by 5.5% as their economy internal demand for goods continued to decline.
Now President Trump is officially in office, the Chinese Government are worried about the implications of an impending trade war that could begin under his Presidency, as he tries to restore jobs and begin to increase manufacturing of goods in the US. If tariffs are implemented in the US on foreign goods as previously suggested by Trump, China's exports would fall even further in 2017 and beyond which would encourage more capital to flee China.
China's Key Economic Data - All Trending Down
The four key areas the world monitors to gauge the health and prosperity of China's economy are GDP, Industrial production, retail sales and fixed asset investment. From the most recent data available provided by the Chinese Government (see chart below), you can see the long term charts of all 4 data areas, are trending down from 2010. The official economic data even though may be overstated by the Government on the true state of the economy, reflect the consensus that China is slowing by its own metrics.
The Market Reacts To A Slowing China
The market has taken notice on the shift of China's economy and the problems its currently faces, as traders have been steadily increasing the bets on the Chinese stock market that it will fall. The percentage of shorts over shares on the China A shares ETF has jumped from 1% in September 2016 to 13% in January 2017 as traders prepare for a correction in the stock market based on a deteriorating economic outlook for China.
China's Economic Challenges Face No Easy Solutions.
This article highlights the many issues at play contributing to China's slowdown of the economy for 2017. There are however several more issues currently at play that are not covered in this article. See below a short video to highlight some of the problems discuss in this article, as well as others not addressed that China need to solve for the long term viability of the economy and its people.
China & Global Economy Fortunes Tied Together
The implications of China's problems on the global economy are real and significant as the world relies on China's annual GDP growth to fuel global GDP growth. China also relies on the global economy for its export growth. This means that if China's growth slowdown is gathering pace in conjunction with global trade stagnating, it would appear the global economy is heading for another slowdown. If the slowdown persists this could easily turn into a recession. The only difference this time compared to the 2008 - 2009 crisis, is that the stimulus plan that will be implemented by Central Banks and Governments might not work as effectively. This is because the global economy has already been subjected to at least one or more forms of stimulus continuously for the last 8 years to support global growth.
Thanks for viewing Crush The Market latest macro article.
Remember to share this with your friends by clicking on the Facebook & Twitter Icon's Below.
If you have not Subscribed to Crush The Market click on the 3 options: Facebook, Twitter or RSS Feed on the top right side toolbar for latest posts and market updates.
If you would like to view my last macro article on China's debt bubble click the link below:
China's debt bubble threatens global growth as debt to GDP nears 300%
To view my latest chart review on Gold click the link below:
Gold begins the year strong will the bullish run continue for 2017?
Ft.com - Subscription required
The US election results are in and the US stock market is enjoying a sharp rally over the shock news of Donald Trump winning the election and becoming the new President elect.
On the back of the big rally in US stocks there has also been another big shift occurring in another very important asset class, US Government bonds.
US Government Bond Yields Surging
Since the news of the results of the US election were released US Government bonds have experienced a huge sell off in prices causing the yields to surge on Government bonds ranging from the 2 year bond all the way to the long end with 30 year Government bonds. (Note: Bond yields move inversely to bond prices.)
Specifically the US 10 yr Govt bond has seen the yield jump from around 1.80% before the election results to the current price of around 2.13%. (See chart below)
In the chart below you can see the magnitude of the rise in US 10 yr bond yield reaching the same level of the S&P 500 dividend yield.
Traditionally bond yields help to price the relative value of stocks. If bond yields rise the dividend yield on stocks would also have to rise. Usually stock dividend yields are above bond yields to entice investors to own riskier stocks over more conservative bonds. For the yield to rise on stocks either dividends would need to rise and or stocks would have to fall in price to lift the dividend yields.
So the fact that the 10 year bond yield has reached the same level of the S&P 500 dividend yield means that a bond investor can receive the same yield as stocks without the perceived risk.
Normally when Government bond yields rises considerably it indicates that either inflation is also rising and / or the economy is accelerating it's growth prospects. When the economy start to accelerate its growth prospects investors traditionally buy stocks in anticipation of higher profits and dividends from a stronger economy and sell bonds which are considered defensive assets.
Many analysts and financial commenters have already come out and suggested that growth is now back on the agenda for the US economy since the electing of Trump as the new president. Because of the Trump factor these commentators have suggested this is the reason why bond yields are rising and suggest it's a positive.
Why Surging Bond Yields Signals Pain Ahead
However we are not in normal times and there is a very big reason why the FED has spend the majority its balance sheet trying to keep US Government bond yields low, by buying them through the various QE programs and artificially forcing the bond prices higher lowering the yield.
It's also the same reason why the FED has only increased the interest rates once back in December 2015 and has been terrified to rise them further since then. The reason is because the US has a major debt problem from a Government , corporate America and consumer level.
So if the FED has tried all this time to keep rates lows, how is it all of a sudden a good thing for the Government, corporate America, the consumer and the economy that interest rates are now rising. Especially when the debt levels in the US are higher now than before the 2008 GFC event that shook the US and Global economy.
Increased Government Spending
Back in August this year Trump gave a short interview with CNBC, discussing some of the problems in the US and how he was going to fix them.
In the video below he specifically discusses increasing spending on the military as well contributing over $500 billion to the ailing infrastructure in the US.
How Will It Be Paid For?
When asked by the CNBC host how will he pay for all the new additional spending he planned for the US economy. Trump said that he was willing to increase Government debt to fund it as one of the possible strategies. He further added that since interest rates are so low it would be wise to take advantage of the current low rate environment and borrow.
Bond Yields Reacting To Trump Plan
Now Trump will be the new US president I believe Government bond yields are surging not because growth will skyrocket in the US, but because they know that US debt under Trump will rise even faster than under Obama.
If Trump does plan to massively increase Government debt to pay for military and infrastructure spending, he is going to find out quickly that interest rates will not stay low for long.
Bond yields will continue to rise simply because bond investors will reprice US Government debt and the subsequent yield they will demand, to reflect the anticipated surge in debt coming over the next few years. The repricing of US Government bonds will occur to reflect the higher perceived risk of a potential default from considerably higher debt levels.
China Reacts To Trump Presidency
The Chinese Yuan / US dollar pair has been depreciating for while now, however the depreciation against the US dollar has accelerated recently. The currency pair is following closely with the US 10yr Govt bond yield since news of Trump's win was released to the world. (See chart below).
Since China is a large trading partner with the US and China holds a large portion of US Government bonds this is important, as the devaluation of the Yuan and its correlation to the 10 yr yield could indicate that China has accelerated its dumping of US Government bonds in reaction to Trump become President and the potential shift in Trump's trade policies effecting China.
China A Seller Of US Government Bonds
The chart below shows that China has been slowly selling US bonds since August 2015 reducing its holding from over $3 trillion to just below $2.8 trillion with the latest data.
If China decides to dump their holdings of US bonds rather than a gradual selling as has been the case, you could see US bond yields surging significantly higher due to the large amount China currently holds.
Once again given the high debt levels in the US this would create a lot of pain for the US, as US Government bond yields are used to price consumer, corporate, auto and housing loans. If the bond yields continue to rise it will squeeze the cash flow of debtors in the US and the economy will quickly feel the impact as the economy will buckle with higher interest rates.
US Debt Obligations Impossible To Repay
A number that has been raised a few times recently during the lead up to the election results was the total US Government debt of around $20 trillion. However what vary rarely gets mentioned is all of the total obligations or promises that the US Government has made. These include the pension obligations, medicare, social security to name a few.
Ray Dalio from Bridgewater has put together a brilliant chart that encompasses all the Government IOU's as well private debt. (See chart below)
What you will notice is that on the right hand side of the chart that total US debt to GDP stands at over 1000% to GDP. This means that debt is over 10 times to the yearly GDP of the US economy and is too high for the economy to be able to effectively grow out of it. This explains why the US recovery has been so sluggish despite zero interest rates.
With such a high proportion of IOU's relative to the size of the US economy, you can clearly understand why higher bond yields will cause a lot of pain in the future for the US.
The previous chart above on the US IOU's is actually a global trend with many countries having a similar looking chart with Government and Private debt rising rapidly over the years.
When you take a look at the chart below on the left, you can understand why Central Banks around the world have struggled to lift rates over the last 5 years. The reason they have not been able to normalize is that debt levels globally are too high to sustain in any interest rate rise.
In fact over the last 18 months or so many Central Banks have cuts rates to further spur economic growth without much success.
Central Banks Stuck In Interest Rate Limbo
In previous economic cycles after Central Banks cut interest rates to stimulate the economy they were able to lift them higher as the economies expanded. However in 2016 the debt levels have grown so high relative to GDP just like the US, the global economy is no longer able to handle higher rates without crashing the Global economy.
As an example on the global debt problem, I recently wrote an article about the huge ballooning debt in China and how its negatively effect the economy. See: Chinas debt bubble threatens global growth.
The only solution to the debt problem for the Central Banks (CB's) is QE liquidity injections to keep the status quo going. The chart below on the right shows the global equities market addiction to CB's liquidity, with a strong correlation to movements in liquidity. What this shows is that stock markets follow CB's liquidity above the actual strength or weakness of economies.
We Have Reached Our Debt Limits
In September Ray Dalio outlined very simply that we have reached the Debt limits globally, and low rates and lower interest payments no longer work because the debt is too high to have any additional stimulus effect on growth. (See video below)
If you have not seen this short video before take a look to hear Ray explain the current problem the world is facing.
Higher Bond Yields To Cause Economic Pain
Therefore on the flip side if the debt is too high that low rates no longer cause an stimulus boost or economic impact, higher rates will negatively impact the US economy. This is because as higher rates ultimately reduce demand as higher interest payments take a higher share of disposable income and reduce overall spending power.
If overall spending demand is reduced in the economy this will lead into another recession or deeper economic crisis.
Considering the US economy is already weakening as recent economic indicators is signalling a slowing economy or even recession see: US economy continues to weaken.
Higher bond yields will therefore only tip the US economy faster into economic contraction.
Thanks for viewing Crush The Market latest post.
Remember to share this with your friends by clicking on the Facebook & Twitter Icon's Below.
To Subscribe to Crush The Market click on the 3 options: Facebook, Twitter or RSS Feed on the top right side toolbar.
One by one real estate markets across the globe have begun to pop as the record real estate bubble has turned to a slow down in prices and growth. Multiple regions and real estate markets have begun to cool despite record low interest rates and Quantitative Easing (QE) stimulus.
Until recently the global real estate markets had been one of the best performing asset classes over the last 7 years, as Central Banks coordinated efforts to stimulate the economy in 2009 and further in 2012 - 2016 brought interest rates around the globe to record lows. Some countries even went negative with the objective to ensure GDP growth continues.
The Tipping Point Of Stimulus - Too Much Of A Good Thing
Eventually though any market will reach the limits of what artificial stimulus can do to prices and demand. Whether its auto / car market, think of the cash for clunkers stimulus and the more recent auto subprime loans bubble in the US, or whats happening right now with real estate prices in different countries. Eventually demand begins to wane even when stimulus remains or increases. This happens when too much of a good things begins to take hold and stimulus actually becomes a negative to demand.
Pizza Eating Example:
If your hungry and you love pizza you decide go to a pizza restaurant. The demand for eating pizza is high, however eventually the demand or desire for more pizza will start to fall until you reach the point of when you don't want no more pizza. Your desire or demand will not change even if the pizza price falls by 50% making it easier to buy more. Why because you reach the limits of your own consumption and demand eventually disappears.
This simplified example works in a similar way to economic stimulus in asset markets as it does for the rise and fall in demand for pizza. Everything has a limit where extra stimulus stops being effective.
Luxury Manhattan Real Estate - Latest Market To Correct
The luxury real estate market in Manhattan is one of the latest markets to cool as it pop its real estate bubble. In the chart below you can see the declining trend in growth in prices in Manhattan. Since January 2015 where growth was around 8% pa, the level of growth has continued to fall each month to February 2016. Where the data shows that it has gone negative to close to a 1% fall in prices.
San Francisco area has been another hot real estate market that has started to cool down, despite being a trendy place to live and close to employment opportunities. With several big Technology companies headquarters located in the area.
In this short video below its give you a good understanding how the bullishness of the real estate market has tapered off, as the real estate sales and prices have soften and the time taken to sell has increased compared to a year ago.
One of the reasons why the San Francisco real estate market has started to cool despite low interest rates and stimulus is due to the fact the employment levels in the area has peaked, and has been stagnating since September last year with no growth recorded in employment in the area. This has effected rental demand and rental prices have begin to come down also weighing on the San Francisco real estate market.
Based on the indicators and the employment data the trend for this real estate market is not looking good going forward.
Across over to Vancouver real estate market in Canada, has experienced a spectacular fall in prices in a very short period of time. (See chart below)
Similar to San Francisco real estate market, Vancouver had experienced sharp rises in prices over the last few years as foreign buyers and local demand drove up prices. This was due to record low interest rates forcing investors to find a destination to earn a return on their capital, as cash and bonds income continued to fall. However recent tax increases for foreign buyers in Canada has effected demand dramatically in the area, with prices falling sharply since July this year.
The video below gives you a snapshot of the current Vancouver real estate market and the fallout from a sharp drop in home sales in the region. On a bright note they expect the market to remain relatively stable moving forward. Given the global backdrop in real estate trends this assumption may change.
In the UK commercial real estate has been experiencing a slowdown since the beginning of the year and was in the process of cooling before the Brexit vote dampened confidence for this asset class further causing further pain for the sector.
The graph below shows the trend in property deals value falling compared to the same month year ago. The trend is clearly falling faster as February through to May show steeper falls than January.
The falls in property deal values is most likely the consequence of income and capital growth returns continuing to fall each month since reaching the peak in October 2014 of 12.95% return, to the current return of 5.91% in March 2016. (See chart below)
Australia's real estate bubble has continued to remain red hot in bubble territory despite warnings from BIS and other groups on debt levels. To see the article click here Australia's debt addiction fuels bubble.
Despite the residential real estate market continuing to perform strongly in Australia, the Australian real estate investment trust (REIT) sector which predominately focuses on commercial real estate, has experienced sharp falls in prices since August. The REIT sector current price has fallen back to the levels set in April this year despite setting a yearly high back in July this year.
Why It Feels Like Everything Is OK
This chart below shows exactly why it appear that everything seems to be OK even though each month another real estate market across the globe starts to cool as their bubble pops and deflates.
The chart below shows global GDP expectations for 2016 overlapping the global stock market and global central bank balance sheet levels.
The chart shows the blue line which represents global central bank balance sheet continuing to increase, and the global stock market following this trend up with it since the start of this year.
What this indicates is that the global stock market is being held up by artificial stimulus as the stock market no longer reflects global GDP movements to the downside.
I'm aware that not every real estate market around the globe has started to pop. In fact some markets like China and Australia residential market are continuing to go higher.
The signs however are getting stronger as more and more real estate bubbles popping are emerging each month. Eventually more real estate markets will be effected, as the stimulus effect on demand starts to fade. Coupled with the fact global GDP continues to fall and the effect it will have on employment levels will cause real estate markets to fall in more regions.
bloomberg.com - 1
bloomberg.com - 2
zerohedge.com - 1
zerohedge.com - 2
zerohedge.com - 3
China's remarkable growth in GDP has provided a large boost to global growth over the years. As the global economy and trade recovered from the GFC in 2009 and 2010, China was major contributor in reversing the global down turn and lifting GDP higher.
China Growth Fueled By Record Debt Levels
Its no secret anymore that the real reason, China has been able to rebound so strongly in the last 7 years, was because China has accumulated a record amount of debt to fuel its own GDP growth and keep demand for global trade strong.
Now that total debt to GDP is approaching 300% (see chart below) in China, its starting to become a drag on the largest economy in the world. As the economy continues to slow due to its debt bubble impacting growth, it increases the risk that China will actually threaten global growth as it deals with its own debt crisis.
If you take a look at the chart below from 2004 to 2008 period, you will notice that the debt to GDP ratio was stable and moving sideways at around 175% debt to GDP. This indicated that the economy was growing in sync with the level of debt growth within China's economy, which is a healthy sign of a growing stable economy despite at the time debt to GDP was high.
However when you look at the chart from 2008 to 2016, the debt to GDP starts to increase for the first few years and then accelerates as it approaches 2012 over the next 4 years to 2016. This trend is not a healthy sign for China's economy, as this indicates that the GDP growth has been unable to keep up with the level of debt taken on within the economy.
If debt is growing faster than GDP the debt stops becoming a contributor to growth and instead starts to drag on growth especially as debt to GDP ratio accelerates.
China To Drag Global Economy Down
Now that the debt has become a major problem in China, there have been a number of people and international groups including the BIS, Bank of England (BOE) and NAB Bank among others, who have raised concerns over the growing risks that China's debt bubble poses on the global economy.
The video below is from a former chief economist of the IMF Ken Rogoff discussing the key issues he believes China's slowdown poses on the global economy.
Debts Start To Pile Up
The chart below is from 2014 and shows the EBIT debt coverage of 780 bond issuers in China, and the level of interest payments to operating profits.
You can see that back in 2014 a number of debt issuers had a level of 100% or higher EBIT debt coverage. Meaning that the interest payments were higher than operating profits to pay for the loan. Leaving the only options of defaulting on the debts or borrowing more money to pay the interest. Borrowing money to pay existing interest and debt is the definition of a ponzi scheme.
The chart is very interesting even though its from 2014, as it layed the foundation for the problems companies in China are facing in 2016.
According to Reuters.com 25% of Chinese companies profits in the first half were not higher enough to service their debts and make their interest payments.
China's Debt Crisis Too Big For Government Stimulus To Be Effective.
Professor Steve Keen highlights in this video below, his agreement with BIS assessment of China's debt crisis, the subsequent slowdown in growth and how China grapples with its high debt levels.
Steve also suggest that the China's Government will attempt to stimulate the country to allow it to grow out of its debt problems, however he believes the problem is too big even for the Government to handle without experiencing a downturn in the economy.
Global Growth Slowdown To Continue
China's debt crisis and its subsequent slowdown within its own economy, is coming at an inconvenient time for the global economy. Many countries including the US economy are starting to experience a slow down as recent economic indicators highlight the slowdown in global growth.
Within the US it's becoming more apparent that the US economy is about to experience a recession or may already be in a recession unofficially.
To see the recent post on the slowingUS economy click on the link . Is the US in a recession?
Via Social Icons
Crush The Market Follows:
- Peter Schiff
- Bert Dohmen
- Steve Keen
- Rick Santelli @ CNBC
- Robert Kiyosaki
- Markets and Money
I am a private trader and equities investor that loves the trading and investing world, following the markets and everything in between.