Mega Default In China

leverage, leverage and more leverage - and then leverage on top of leverage.....it is always the systemic problem that brings an economy to a halt (ruin)....

leaders try to tinker and put band aides on the problems (or ignore them and just throw more money at them) and they grow until one day the leverage rubber band breaks....

this article could have be written about most industrialized nations and their history of dealing with economic issues - including America!

Mega Default In China Scheduled For January 31

http://www.forbes.com/sites/gordonchang/2014/01/19/mega-default-in-china-scheduled-for-january-31/

In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

Most analysts don’t worry about a WMP default.  Their argument is that the People’s Bank of China, the central bank, is encouraging a failure of the Zhenfu product to teach investors to appreciate risk and such lesson will improve the allocation of credit nationwide.  Furthermore, they reason the central authorities would never allow a default to threaten the system. 

Observers make the logical argument that “to have a market meltdown, you have to have a market” and China does not have one.  Instead, Beijing technocrats dictate outcomes.

That’s correct, but that is also why China is now heading to catastrophic failure.  Because Chinese leaders have the power to prevent corrections, they do so.  Because they do so, the underlying imbalances become larger.  Because the underlying imbalances become larger, the inevitable corrections are severe.  Downturns, which Beijing hates, are essential, allowing adjustments to be made while they are still relatively minor.  The last year-on-year contraction in China’s gross domestic product, according to the official National Bureau of Statistics, occurred in 1976, the year Mao Zedong died.

Why will China’s next correction be historic in its severity?  Because Chinese leaders will prevent adjustments until they no longer have the ability to do so.  When they no longer have that ability, their system will simply fail.  Then, there will be nothing they can do to prevent the freefall.