China’s credit bubble is unlike anything in modern history, according to Fitch.
Ambrose Evans-Pritchard of The Guardian reported that Fitch thinks the scale of Chinese credit is so massive that it can no longer grow out of its excesses. And the statistics are scary:
- “Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. ‘They have replicated the entire US commercial banking system in five years,’ she said.”
- “The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990.”
In light of this, we put together four charts on China’s credit bubble that you need to see.
First up, the main bear argument on China: It is taking more and more credit growth to deliver less economic growth.
Second, the estimated outstanding Wealth Management Products.
In China, wealth management products are popular, interest-bearing retail products that are backed by a hodge-podge of risky assets. They function as a replacement for normal investment/savings accounts, but are not guaranteed.
A crackdown on Wealth Management Products (WMPs) has seen WMP issuance slow in 2013. But Charlene Chu at Fitch writes that this continues to pose a risk to the banking sector because it accounts for a “sizable amount of funding.”
“In Fitch’s view, the primary risk centres on the cash payout pressure posed by WMPs’ short-term nature, the poor liquidity of underlying assets, the high mobility of WMP investors, and banks’ mismatched assets and liabilities.”
Third, the rise in gross issuance which is close to 115 products a day.
Fourth, the recent spike in SHIBOR, or the Shanghai interbank offered rate, which is an interest rate used among banks showed signs of liquidity stress in China.
SHIBOR is considered a useful proxy for liquidity in the Chinese credit markets, more specifically, the recent spike in Shibor showed a liquidity squeeze. In a new note, Morgan Stanley’s Richard Xu writes that “SHIBOR and repo two-week rates did not ease significantly after the three-day holiday, and one-month rates even spiked by ~80bps, implying that the recent liquidity tightness is likely more associated with recent intense regulatory actions than holiday effect.”
These four charts show the rise in China’s credit bubble and the recent liquidity squeeze.
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