Monday, November 20th, 2017 MST

IMF warns on China’s corporate debt

For years, China watchers have warned that banks there are vulnerable to failure because of bad debt that the banks refuse to recognize.  Now the IMF says that China’s corporate debt, which stands at 145 percent of Gross Domestic Product, “is a potential risk to the global economy.”

Interestingly, the IMF was not the first establishment source to call attention to China’s corporate debt problem.

The head of China’s central bank (People’s Bank of China) has long decried the “private” debt build-up there.  And, in May the official People’s Daily newspaper ran an interview with an unidentified “authoritative figure” who warned that soaring debt levels could trigger a systemic financial crisis.

However, 55 percent of the corporate debt is owed by state-owned enterprises, making unlikely any solution other than shoring up the companies.

Still, a deputy director of People’s Bank of China has said that “zombie companies” should be allowed to die, calling for an orderly system that will permit financial institutions to go bankrupt while restructuring those that need restructuring.  “Shut those that need to be shut,” he said, “and strengthen market discipline.”

A communist calling for “market discipline?”  Slowly Austrian economic theory is being grasped by economists trained in Keynesian economic theory.  But, it is not happening fast enough to reverse the suicidal course that Keynesians have taken us on.

It is not likely that China will stand back and not print more money as corporations start to fail and unemployment increases.  China will print more renminbi (yuan), and serious inflation will take hold there.

Gold and silver will become even more popular with the Chinese people­­–and people around the world–as China’s economy struggles and inflation grows.

2 Responses to “IMF warns on China’s corporate debt”

  1. RK_in_TX

    Bill, I agree with you (and no surprise, there) that “Gold and silver will become even more popular with the Chinese people­­,” if China simply prints more renminbi, but haven’t we seen this sort of situation before with the falling euro, due to the Greek crisis?

    It seems that along with turning to gold, relative to their own currencies, foreign citizens will also (rightly or wrongly) turn to the US dollar, thereby boosting it, and this can cause the price of gold as expressed in US dollars, to fall, all despite gold becoming more popular with “people around the world.” How can we ever tell which will be the dominant effect (popular gold vs. popular US dollar), especially in the near term?

    • Bill Haynes

      RK, keen insight on your part.

      Yes, as other currencies become questionable, some of the money will flow to the US dollar (as long as the US is the best looking horse in the glue factory). This is especially true for “big money.” However, average investors will not turn to the dollar; they will go with gold and silver. Average investors do not know about “dollar deposit accounts” and are not likely to buy dollars and stash them away. This is especially true in China where the government has made it easier to buy gold and silver.

      As for the dominant factor, as the current state of affairs in the US get scrutinized, the dollar will be less appealing. How long has it been since you heard the $900 billion deficit discussed? And, our economy is not “robust,” which means a continued loose monetary policy by the Fed, plus many establishment economists calling for fiscal stimulus programs that would exacerbate the deficit further.

      Even then, not all scared money will go gold but enough will that the price of gold will rise relative to other commodities and “safe investments.”

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