The Fed has China Debt Bubble’s Blood on its Hands

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IMF officials warned this weekend, China must act quickly to address mounting corporate debt, a major source of worry about the world’s second-largest economy.

China’s surging debt load has profound implications for U.S. equity markets, it’s the subprime mortgage crisis all over again, just a different serpent, another beast.

David Lipton, first deputy managing director of the IMF, warned in a speech to a group of economists in the southern city of Shenzhen that companies’ indebtedness is a “key fault line in the Chinese economy.”

Reuters

The U.S. Federal Reserve clearly has the China debt bubble’s blood on its hands.  As the Fed kept interest rates near zero for 8 years and expanded its balance sheet, Chinese companies used the easy money gravy train to LEVER up (see below).

China Debt 2

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“Company debt problems today can become systemic debt problems tomorrow. Systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both,”

IMF

China, whose economy grew in 2015 at its slowest pace in a quarter of a century, has been trying to deal with with rising debt levels and overcapacity.

People’s Bank of China warned in its mid-year work report that the government’s push to reduce debt levels and overcapacity could increase bond default risks and make it more difficult for companies to raise funds.

Corporate debt in China stands at about 145 percent of gross domestic product, a dangerously high ratio. State-owned enterprises, accounted for a staggering 55 percent of corporate debt but only 22 percent of economic output, according to IMF estimates.

China must deal with both creditors and debtors and to address governance problems in both the corporate and banking sectors.

 “The lesson that China needs to internalize if it is to avoid a repeating cycle of credit growth, indebtedness, and corporate restructuring, is to improve corporate governance.”

IMF

China leverage side effects continue to explode.  Pick up our latest trading ideas, click on this link:

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