The growing problems in the Chinese banking system could spill over into a wider financial crisis, one of the most respected analysts of China’s lenders has warned.
Charlene Chu, a former senior analyst at Fitch in Beijing and now the head of Asian research at Autonomous Research, said the rapid expansion of foreign-currency borrowing meant a crisis in China’s financial system was becoming a bigger risk for international banks.Sponsored Ads
“One of the reasons why the situation in China has been so stable up to this point is that, unlike many emerging markets, there is very, very little reliance on foreign funding. As that changes, it obviously increases their vulnerability to swings in foreign investor appetite,” said Ms Chu in an interview with The Telegraph.
Queues in the City, banks raising cash in a hurry from the authorities and a rush to obtain gold – sounds like September and October 2008?
No, this was late July and early August 1914. Even before a shot had been fired by a British soldier, markets were gripped by fears of the consequences of war.
It is a story which in the 100 years since the outbreak of World War One has not been widely chronicled.
Former Bank of England Governor Mervyn, now Lord, King said at the height of the 2008 banking crisis that it was the worst since August 1914.
Not much has changed in the EU since the financial crisis, the festering economic disaster that has been kept from the headlines as the US Fed and the ECB printed money as fast as they can, is set to make a return to the spotlight.
As many economists including myself have said, printing money just defers the real problem. While it appears the US is in boom time and Obama is the greatest financial President in history, the reality is very different.
Money Printing may help the headline Wall St numbers but the global economy struggles, and will continue to struggle until the money printing stops, and economic growth is actually addressed.
The facts support a weaker Euro and a sell off in risk assets like European Banks along with a substantial correction on Wall St.
The mounting diplomatic crisis in the last week of July 1914 triggered a major financial crisis in London, the world’s foremost international centre, and around the world. In fact, it was the City’s gravest-ever financial crisis featuring a comprehensive breakdown of its financial markets. But it is virtually unknown. The reason is straightforward: it is simply absent not only from general texts but also from most of the specialist literature.
In its day, however, the financial crisis of 1914 was a very real and alarming episode as reflected in the press and in official and bank records. Several participants left crisis diaries that provide vivid testament. It also features in some general diaries and in contemporary novels. Keynes, who was marginally involved, published three journal articles on it in 1914. And three journalistic accounts appeared in 1915. But thereafter very little. The reason, presumably, is because the financial crisis was overshadowed by the diplomatic crisis and then the military conflict, of which it was collateral damage. Plainly, the existential struggle was more important and dramatic than the financial disintegration. Every political, social, cultural, and economic dimension of life was in crisis in summer 1914: there was nothing especially notable about the financial sector being in trouble.
China and India are at risk of a sudden slowdown as there is no precedent for their high growth rates being sustained. This conclusion, reported in today’s Australian newspaper, is the result of an influential Harvard study by President Barack Obama’s former chief economic adviser Larry Summers and his colleague Lant Pritchett.
The study found that periods of rapid growth nearly always revert back to long-term average world growth rates, with the end usually coming suddenly. The chance of China sustaining a growth rate of 9% for another two decades is less than 1 in 100.
These conclusions come at the same time that the Organisation for Economic Co-operation and Development (OECD) has stated that there are rising risks of a new world financial crisis sparked by financial weakness in emerging countries, particularly Indonesia and India. Those same countries have been responsible for the vast majority of global economic growth since the global financial crisis, but currently have large external deficits.
Andy Xie has been warning about the dire consequences of asset bubbles for most of his career. In his latest broadside, about the consequences of the Federal Reserve’s decision to continue quantitative easing, he has raised the volume on his megaphone.
The former Morgan Stanley economist reckons the global flow of hot money into government bonds and real estate has reached such a scale that the current asset bubble is greater than the one that unleashed the 2008 financial crisis. When the Fed eventually puts the brake on its money-printing, the bursting bubble will, he argues, bring a worse recession than the one we have just endured.
Dr. Xie’s fans reckon he has form, having warned in August, 2008, of an impending U.S. financial meltdown and, previously, calling the dot-com boom a financial bubble.
In his latest missive, published in Caixin, the Chinese news magazine, he accuses the Fed of fuelling a potential disaster, in its mistaken attempts to create employment at home through monetary stimulus. Instead, the policy has only led to job creation by competitive devaluation.
“Get ready for some scary reading”
Come mid-October, the United States will have only $30 billion of cash on hand. On any given day, its net payments can reach as high as $60 billion. That means that unless Congress raises the debt ceiling, allowing the Treasury to issue new debt, the United States may find itself unable to make all of its payments — stiffing government contractors, or state and local governments, or even its bondholders.
Economists widely agree that such an unprecedented event would have profound effects for the markets, likely precipitating a stock-market sell-off and setting off a round of global financial turbulence. But it has always been a little unclear just how it may play out. The Treasury might announce it would be forced to delay some payments, promising to do what it could to make sure bondholders were made whole. But then what?
The team at RBC Capital Markets has put together a terrifying play-by-play for the Alphaville blog of The Financial Times. It shows how a debt-ceiling breach would translate quickly into a credit crunch and financial crisis with some disconcerting similarities to 2008. Get ready for some scary reading:
In other words, the very asset that most people believed led to the credit crisis is also the asset that is pretty much exempt from the new rules! Classic.
On the list of cures for the sick financial system, the concept of “risk retention” ranks right behind capital — but there are a couple of neat little twists here. The narrative of the crisis is that because mortgages could be sold off to banks, who would turn them into securities and sell those on to investors, who thought they were buying triple-A paper courtesy of the rating agencies — well, no one had any incentive to care about credit quality. In a piece in the Wall Street Journal entitled “How to Create Another Housing Crisis,” MFS Investment Management’s former chairman Robert Pozen writes, “With ‘no skin in the game,’ the originators had little incentive to determine whether the borrower was likely to default.” As a result, one provision of Dodd-Frank requires securitizers of any asset, not just mortgages, to retain 5 percent of the risk of loss. Barney Frank has said that the risk retention rules are the “most important aspect” of the legislation that bears his name.
The first twist is how risk retention became risk liberation. The housing-industrial complex went to work. Into Dodd-Frank went a provision that certain “safe” mortgages, called qualified residential mortgages, or QRMs, would be exempt from the risk retention requirement. “Safe” was left to the regulators to define. Cue more lobbying. The rules finally proposed in late August would exempt, according to a Wall Street Journal piece by Alan Blinder, some 95 percent of mortgages from the risk retention requirement. In other words, the very asset that most people believed led to the credit crisis is also the asset that is pretty much exempt from the new rules! Classic. In the joint announcement on August 28, the regulators wrote, “The Commission acknowledges that QM does not fully address the loan underwriting features that are most likely to result in a lower risk of default. However, the agencies have considered the entire regulatory environment, including regulatory consistency and the possible effects on the housing finance market.” (That last bit is super scary.)
This is a warning that the entire global economy should take seriously. Not just other emerging markets.
… I argued further that the long prevalence of extremely low interest rates is likely to be creating the conditions for a serious financial crisis; all the economic activities that are profitable due to low rates will become unprofitable and will not be able to repay their obligations.
For this reason, it is necessary to prepare for such eventuality. This is what Rajan is doing by increasing interest rates in India, by easing the appetite for unsustainable activities that can survive only with low rates. The Financial Times quotes his rationale: “Let us remember that postponement of tapering is only that—a postponement…Let’s not lose the chance, the warning that we have been given, because this is going to come back and what we need to do is put our house in order before.”
The Swiss-based ‘bank of central banks’ says a hunt for yield is luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”.
This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong.
“This looks like to me like 2007 all over again, but even worse,” said William White, the Bank for International Settlement’s former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.