Expect Chinese “lost decade” soon

China Credit Squeeze Prompts Suicides (Bloomberg)

“Wenzhou’s 400,000 businesses are facing financial hardship because of rising costs, soaring black market interest rates and a sudden credit squeeze, Zhou said. Similar problems are happening across China because private enterprises in China rely on underground borrowing rather than banks to operate, he said. “

This blog has a solid commentary:

“The problem is that very few in China was afraid of massing large debts, and the entire economy has been slowly pulled into a cycle of rapidly increasing credit. The reason why so many empty buildings have been built is that they are good collateral. It’s true that the young want homes, but the big push to build ever more buildings has been driven by people buying property as collateral and an investment. Those empty cities you see discussed are bought cities. Businessmen wanted the buildings as collateral for much cheaper loans, and almost any structure turned into a paying investment.”

This is precisely what happened in Japan thirty years ago; buildings were used as collateral for ever increasing credit until the bubble popped; and it’s been downhill ever since. Japan’s population was younger at the start of that downturn than China’s is now, and more socially cohesive.

Expect “lost decades” in China coming soon.


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