Chinese Credit Crunch Probable Say Analysts

A credit crunch in China is “highly probable” this year as slowing economic growthprompts a surge in bad debts, Bank of America Merrill Lynch predicts.

Chinese president Xi Jinping this week trumpeted the “new normal” referring to slower growth as the government tries to rein in the credit boom – which has led to a debt pile of $26 trillion – and rebalance the economy from overly relying on exports and investment to consumer spending.

Bank of America Merrill Lynch strategists David Cui, Tracy Tian and Katherine Tai argue: “Few countries that had grown debt relative to GDP as fast as China did over the past few years escaped from a financial crisis in the form of significant currency devaluation, major banking sector recap, credit crunch and/or sovereign debt default (often a combination of these).”

The analysts believe that the government has unlimited resources to bail out banks and other organisations as the debts are mostly in renminbi, and the country’s central bank can always print more money.

They argue: “We suspect that the most likely scenario for China is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking sector as investors become risk averse, and followed by a major financial system recap engineered by the government with the People’s Bank of China playing a central role.”

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza