Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

What Your Not Hearing About China’s Subprime Housing Mortgage Crisis

Housing-Market / China Housing Market Jul 30, 2013 - 12:52 PM GMT

By: Money_Morning

Housing-Market

China is the world's second-largest economy, a simple fact that underscores the importance of its financial health to investors worldwide.

And unfortunately, thanks to China's subprime crisis, it's not doing as well as we're led to believe.


The Chinese stock market has fallen to levels unseen since the 2009 global financial crisis, and short-term interest rates have reached as high as 25%.

We've been told by the mainstream financial press the Chinese economic crisis is being caused by shadow banking.

The term has been demonized by reporters outside China. But that's not the whole story. In fact, there is a valid reason for shadow banking to thrive in China:

"Chinese banks are mostly state-owned, and they rarely lend money to the private sector. Thus, there has always been strong demand for financing outside of official banking circles," says Money Morning Global Investing & Income Strategist Robert Hsu.

Keep reading to see why it's not shadow banking, but a phenomenon that hits much closer to home for Americans that is the real cause of China's economic woes...

First, you must understand how shadow banking works, because it plays a major supporting role in the real problem.

A state-owned company will borrow from a state-owned bank at the low interest rate set by the government, somewhere around 5%.

"With access to cheap loans, many government entities re-lend money out at higher rates. All-in-all, local governments love shadow banking," according to Robert. "Investors are willing to participate because they believe that the central government will bail them out when the bubble breaks."

Shadow banking is utterly widespread in China right now. It naturally derives from financial repression.

"Shadow banking encompasses everything from private loan sharks to fixed-income investment products sold by banks/insurance companies to the general public," Robert explains.

He points out that shadow banking really took off back in 2009, when the banks were ordered to finance infrastructure and investment spending:

"Local governments, state-owned enterprises and other quasi-government entities then borrowed trillions to build all sorts of projects, creating massive inflation and Yuan devaluation in the process."

Massive inflation and currency devaluation is a shot across the bow to any economy; to the world's second-largest economy, it's a shot heard 'round the globe.

"The significance of shadow banking is that it's China's version of subprime real estate lending, which can blow up and damage the Chinese economy," Robert tells us.

Ventures that look sketchy at 9% interest rates suddenly seem feasible at 5%. Thus, traditional banks steadily lower their lending standards, from prime loans, to subprime, to more and more irresponsible loans.

THAT is the real cause of China's economic problem right now - not shadow banking per se.

Are you thinking back to the U.S., circa 2008 right now? If so, you are dead on.

And here's a scary number:

"The scope of lending is around $5 trillion, larger than the $3 trillion in U.S. subprime debt back in 2008," Robert points out.

But, unlike most of the sensationalist outsider reporting you see on China's economic issues, Robert, an insider who knows how China really works firsthand, isn't freaking out.

Here's why...

First, he doesn't think the impact on the global economy would be absolutely disastrous should China's subprime market burst.

"It's true that any such blow up would be bad for the rest of the world, but because of the Yuan's regulated nature, a fallout would be less global than the European financial crisis."

And second, he believes the Chinese government is "taking the right steps" to crack down on shadow banking, thwarting a subprime burst.

"The new administration in Beijing, already wary of inflation, is reluctant to play along," Robert stresses.

The administration's tightening "credit crunch" is sending a signal to all the players that Beijing will not be there to bail out everyone when the bubble collapses.

It seems to be working, scaring away some of the money.

"Post-crunch, rates spiked up then fell back down, but it is harder now for weaker players to get financing," Robert says.

So, the Chinese government must continue to walk this very fine credit-crunch line. Not enough will fail to thwart rising interest rates; too much will burst the subprime bubble.

Says Robert: "I don't have any easy solution, but it would be a global problem if Beijing fails to handle it properly."

And so investors must sit back, watch, and root for China to maintain its slow climb out of an economic bind.

At least this time for American investors, it feels like a much more comfortable chair than in 2008.

If you're an investor looking for a safe way to navigate China's credit crunch as it ripples through the world's economy, see Money Morning's Global Investing Specialist Martin Hutchinson's picks here.

Source :http://moneymorning.com/2013/07/29/what-the-financial-press-isnt-telling-you-about-chinas-subprime-crisis/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

R.E.B
30 Jul 13, 20:31
Central Planning Fail!

Why do people believe that China's central planners will be any more successful than the Soviet ones or the American ones? The fact that the bubble exists in the first instance is evidence already of a collosal failure of central planning.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules