Friday, 12 February 2016

China’s $34 Trillion Experiment Is Exploding

Scary story by Kyle Bass on China's economic and financial problems. Some snippets:

".... China’s liquid reserve position is already below a critical level of minimum reserve adequacy. In other words, China is CURRENTLY out of the required level of reserves needed to safely operate its financial system. The view that China has years of reserves to burn through is misinformed. China’s back is completely up against the wall today, which is one of the primary reasons why the government is hypersensitive to any comments regarding its reserve levels or a hard landing. China’s public reaction in its state media to George Soros’ comments in Davos was in character for a country that is on the precipice of a large devaluation. What is extraordinary is the disconnect between the global discussion on China and the reality on the ground. As economic growth has slowed dramatically, bank credit growth accelerated sharply, leaving the banking system vulnerable to large losses.

Remember, Bernanke had the subprime crisis wrong when he said it was “contained,” Lagarde and Sarkozy had it completely wrong when they said speculators were the cause of Greece’s problems, and now they all have it wrong when they say China’s problems are due to a simple “communication problem” regarding its FX policy. The problems China faces have no precedent. They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances. Risk assets will not be the place to be while all of this is happening.

Once we drew this conclusion in the middle of last year, we decided to liquidate the majority of our risk assets and position ourselves for the various events that are likely to transpire along this long road to a Chinese credit and currency reset. The next 18 months will be fraught with false-starts, risk rallies, and second-guessing. Until China experiences a significant devaluation, it will not be able to cope with the build-up of credit that has helped fuel its rise, but may, in the short-term, be its undoing.

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