JayAtl
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Thursday was a very bad day for Chinas economy, the worlds second-largest and a crucial pillar of the global economy, with credit markets freezing up in an unnerving parallel to the first days of the U.S. financial collapse. The question of how bad depends on whom you talk to, how much faith you have in Chinese leaders and, unfortunately, several factors that are largely unknowable. But we do know two things. First, Chinese leaders appear to be causing this problem deliberately, likely to try to avert a much worse problem. And, second, if this continues and even it works, it could see Chinas economy finally cool after years of breakneck growth, with serious repercussions for the rest of us.
Things got so bad that the Bank of China has been fighting rumors all day that it defaulted on its loans; if true, this would risk bank runs and more defaults, not unlike the first days of the U.S. financial collapse. Theres no indication that the rumors are true, and no one is running on Chinas banks. But the fact that the trouble has even gotten to this point is a sign of how potentially serious this could be.
Heres what has happened: Chinas credit market has been in a bubble for years, with too much lending and borrowing, similar to what happened in the United States during the financial crisis. All that lending helps grow the economy until, one day, the bubble bursts, and it all comes crashing down, as happened the United States. Chinas economic growth has been slowing, making a similar a crisis more likely. Chinese leaders seem to be trying to prevent a disaster by basically popping the bubble, a kind of controlled mini-collapse meant to avoid The Big One.
In a real, uncontrolled credit crisis like the U.S. financial meltdown, credit suddenly freezes up, particularly between banks, meaning that the daily loans banks were relying on to do business are suddenly no longer affordable. Banks with too many unsafe loans suddenly owe more money than they can get their hands on, sometimes leading them to default or even collapse. And that means that it suddenly becomes much tougher for everyone else companies that want to build new factories, families that went to buy a home to borrow money. Thats an uncontrolled credit crisis, and a number of China-watchers have been worried that China, in its pursuit of constant breakneck growth, could be headed for one.
Chinas central bank, which is likely to tamp down all that unsafe lending and over-borrowing before it leads to a crash, appears to have forced an artificial credit crisis. (It tested a more modest version just two weeks ago.) It looks like the Peoples Bank of China has already tightened credit considerably, making it suddenly very difficult for banks to borrow money. Something called the seven-day bond repurchase rate, which indicates liquidity or the ease of borrowing money, shot way up to triple what it was two weeks ago.
This pair of charts, from the economics site Zero Hedge, shows the eerie parallels between todays freeze-up in the Chinese interbank lending market and what happened in the United States when Lehman Brothers collapsed, setting off a global crisis that were still recovering from.
China’s economy is freezing up. How freaked out should we be?
