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Why China's credit crunch keeps traders concerned

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Published on Feb 17, 2014

http://goo.gl/UWdmhy

The latest official figures released by the People's Bank of China (PBOC) show that lending in China hit a four-year high last month, adding to concerns already growing among investors and analysts over China's debt bubble.

China is already showing that its getting serious about deleveraging -- in other words, it's going to deflate its USD 24 trillion credit bubble. The worry is that it's difficult to gently let the air out of a bubble and there's a very real possibility that this slow process may get out of control.

Domestic lending reached RMB 1.3 trillion in January, a near tripling month-on-month, and the highest monthly total since 2010. Adding to the woes are figures which showed that bad loans have reached a high last seen in September 2008.

Speaking of the situation in China, market analyst Michael Ingram from BGC Partners says: "I think those looking at the deflation angle in China are really worried about how the ongoing restructuring of the shadow banking system in China is going to precede. Perhaps the prospect of a credit bubble would be extremely deflationary, but unfortunately there's little visibility on that."

That said, there are signs that give investors a hint of what's going on. Michael explains: "We're now about to have a an audit of the shadow banking system, we know there is a vast amount - I think RMB 3.5 trillion - of trust products due to mature this year. We've had a near miss on an ICBC product two weeks ago which was half a billion, and the market was spooked about that, and the ongoing situation with the PBOC will be keeping interbank rates relatively high, relatively volatile and that's going to have an impact on the broader markets in and around China."

The concern is that investors are underestimating the risk. If it gets out of control in China, it could send a deflationary impulse through the global system. Worst hit would be Japan, according to Michael: "Japan is starting from a deflationary base. They have had this massive boost via a devaluation of the JPY but there is a question mark over whether that devaluation can be recycled from corporate profits into wages and wages into consumption."

Meanwhile, the latest Japanese government data showed that Japan's economy grew 0.3 percent in October-December from the previous quarter, posting the fourth straight quarter of expansion, reflecting firm private consumption and a pickup in capital spending.

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