[Rushtalk] Fitch Blasts China, Predicts Implosion

Paf Dvorak notmyname at thatswaytoomuch.info
Mon Jun 17 19:35:00 MDT 2013

News & Analysis

Monday, June 17, 2013

Criminal Malpractice: Fitch Blasts China, Predicts Implosion

By Staff Report


says China credit bubble unprecedented in modern 
world history ... China's shadow banking system 
is out of control and under mounting stress as 
borrowers struggle to roll over short-term debts, 
Fitch Ratings has warned. Fitch warned that 
wealth products worth $2 trillion of lending are 
in reality a "hidden second balance sheet" for 
banks, allowing them to circumvent loan curbs and 
dodge efforts by regulators to halt the excesses. – UK Telegraph

Dominant Social Theme: China is the coming 
monster on the international stage. A real 
<http://www.thedailybell.com/floatWindow.cfm?id=1903>capitalist success story.

Free-Market Analysis: At the end of this article, 
we'll reveal where the "malpractice" mentioned in 
this headline lies. But first, at the risk of 
repeating ourselves, let us remind readers, "We told you so."

For years we've been writing that the Chinese 
Miracle is nothing more than the Japanese Miracle 
writ large and that it would have a similarly 
messy end. This seemed obvious to us, and increasingly to others.

Some background. Western powers, especially the 
US, made a deal with Japan in which Japan printed 
money and then funneled that money to the US, 
especially, to fund the US deficit. In return, 
Japanese products were facilitated in the US and the Japanese economy boomed.

The result was that the Japanese economy was 
further Westernized and huge multinationals 
emerged out of Japan. The US did well, also, 
funding its vast 
complex for a decade.

When the Japanese Miracle sputtered, the same 
sort of deal was made with China. And that has 
been underway for what looks like at least two 
decades. Now the Western powers are gearing up to 
do this in Africa. Probably won't work. But there 
are obviously efforts underway and we've written about them a good deal.

In part, we figure attention is turning to Africa 
because the Chinese Miracle is beginning to 
fizzle. It seems to be running down now just the 
way the Japanese one did. 
bank stimulation can only go so far before it 
ruins an economy, and the Chinese economy is in a fair bit of trouble now.

Don't say we didn't warn you.

We've explained for years, in the face of a tidal 
wave of mainstream China adulation – that the 
Chinese model of capitalism was a kind of 
Village. It appeared to be competitive but at the 
top it was nothing of the sort. The ChiComs were 
in power and are still in power and when and 
where it mattered there was only an appearance of competition.

We're supposed to believe that after thousands of 
years of poverty, 
and warfare, the Chinese 
model managed in 30 years to bring peace and 
prosperity to 1.3 billion people. Not really ...

The engine of the Great Chinese Boom is not, 
unfortunately, the hard work and intelligence of 
a cohesive, wise and ancient culture but likely 
the incredible monetary stimulation of the modern 
Chinese central bank. The great Chinese 
prosperity was probably in large part no more 
than a credit bubble, the biggest the world has 
ever seen. And now Fitch is saying the same thing. Here's more:

The agency said the scale of credit was so 
extreme that the country would find it very hard 
to grow its way out of the excesses as in past 
episodes, implying tougher times ahead. "The 
credit-driven growth model is clearly falling 
apart. This could feed into a massive 
over-capacity problem, and potentially into a 
Japanese-style deflation," said Charlene Chu, the 
agency's senior director in Beijing.

"There is no transparency in the shadow banking 
system, and systemic risk is rising. We have no 
idea who the borrowers are, who the lenders are, 
and what the quality of assets is, and this 
undermines signalling," she told The Daily Telegraph.

While the non-performing loan rate of the banks 
may look benign at just 1pc, this has become 
irrelevant as trusts, wealth-management funds, 
offshore vehicles and other forms of irregular 
lending make up over half of all new credit. "It 
means nothing if you can off-load any bad asset 
you want. A lot of the banking exposure to 
property is not booked as property," she said.

Concerns are rising after a string of upsets in 
Quingdao, Ordos, Jilin and elsewhere, in 
so-called trust products, a $1.4 trillion (£0.9 
trillion) segment of the shadow banking system. 
Bank Everbright defaulted on an interbank loan 10 
days ago amid wild spikes in short-term "Shibor" 
borrowing rates, a sign that liquidity has suddenly dried up.

"Typically stress starts in the periphery and 
moves to the core, and that is what we are 
already seeing with defaults in trust products," 
she said. Fitch warned that wealth products worth 
$2 trillion of lending are in reality a "hidden 
second balance sheet" for banks, allowing them to 
circumvent loan curbs and dodge efforts by 
regulators to halt the excesses. This niche is the epicentre of risk.

All this will be familiar to Daily Bell readers. 
We've been writing about the lack of 
transparency, about the impossibly vast central 
banking-fueled real estate expansion, about how 
the ChiComs themselves will do anything to keep 
the bubble expanded because a contraction may 
cause the entire system to collapse.

Years later, Fitch agrees. With tens of millions 
in resources, prestigious contracts for analysis 
around the world, top young minds from the best 
colleges ... Fitch has brought its tremendous 
acumen to bear and discovered ... what? Things 
the Internet has warned about for years.

We're not that brilliant, of course. We don't 
need to take any bows. We just apply the 
Austrian, free-market paradigm. It allows us to 
see clearly what's taking place in this weary world.

But credit agencies like Fitch resolutely refuse 
to use the model. This is a kind of crime; these 
agencies should be sued for a deliberate lack of 
competence. All of them missed the Great Crash of 2008-2009, as well.

In fact, from what we recall, not a single Wall 
Street agency or researcher anticipated the 
greatest downturn since the 
Depression. Neither did 
Bernanke, who defended the credit bubble right up until it collapsed.

Ron Paul warned about it. But they called him a 
crank. Still do. But the Austrian, free-market 
cycle model has predicted everything taking place 
today. Not 
Not Gesell. Not Bernanke.

Even now, some five years later, the top men of 
these ratings agencies are consistently surprised 
by the world's ongoing macro-failures. We're 
supposed to be surprised, too. But we're not.

It is the crime of the modern age, the real 
scandal of the 21st century, that economics and 
the securities industry continue to resolutely 
ignore the one paradigm that works.

Conclusion: The real malfeasance lies with the 
West's top money-men, the self-described 
globalists who have installed this dysfunctional 
central banking system around the world and 
continually insist on its efficacy, even as it bankrupts country after country.

Paf Dvorak

<http://thatswaytoomuch.info/>notmyname at thatswaytoomuch.info  
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