Bring
up 2008 in a public gathering and chances are the first thing that will come to
people’s minds will be the 2008 financial crisis. How can we forget the
dreadful week of September, 15, 2008, when Lehman Brothers collapsed followed
by American International Group. Who could forget the ominous depleting stock
markets, rampant foreclosures, job losses, panicky bailouts and deteriorated
retirement accounts? Yet, experts are predicting yet another crash. This time
out of China. The only difference is that this particular crash will make the
2008 recession look like a tea party.
If
we look at China, we can see that it is now the world’s biggest trading nation.
Furthermore, it is the second largest economy, holding some $US4 trillion of
foreign currency reserves, which would make any sort of credit crisis be heavily
felt around the world. “The example of how the global financial crisis began in
one poorly-understood financial market and spread dramatically from there
illustrates the capacity for misjudging contagion risk,” Adam Slater wrote in a
July 14, Oxford Economics report.
Compare China to Lehman and AIG, one can immediately notice the prominent set
of similarities. Opaque dealings and off-balance sheet investments make it
impossible for companies to assess their overall vulnerabilities. The term
“shadow banking” has become synonymous with Chinese banking. The idea of
potential instability and contagion-like risk in world markets.
China
has been growing at an incremental rate since 2011. It has already surpassed
Japan in terms of GDP and it is rapidly and ferociously gaining on the United
States. Its world trade weighting has also doubled in the last decade. The real
explosion, however, has been in the financial sector. Chinese stock valuations
have surged from US$1.8 trillion to US$3.8 trillion and bank balance sheets and
money supply have been jumping accordingly. So what is the issue? A growing
economy is good, right?
The
implication derives from an enormous money buildup, one that is responsible for
untold amounts of private-sector debt. The enormous build up is a wake-up call
for genuine concerns over a bad-loan meltdown in an economy that is more than
twice the size of Germany. A crash at the very minimum would torch China’s
property market and has the potential to take down the Hong Kong banking system.
Unfortunately, recent reports from the Financial
Post are predicting an even larger chain reaction potentially hitting trade
economies like Japan, Australia, South Korea and Taiwan.
“China’s
importance for the world economy and the rapid growth of its financial system,
mean that there are widespread concerns that a financial crisis in China would
also turn into a global crisis,” says London-based Slater. “A bad asset problem
on this scale would dwarf that seen in the major emerging financial crises seen
in Russia and Argentina in 1998 and 2001, and also be more severe than the
Japanese bad loan problem of the 1990s.”
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