Shame is forgotten, debts are not. ~ Chinese Proverb
“President for life”. It’s a grandiose title, no doubt. But its allure is directly related to which particular institution one is going to be president of; and for which period of history. In the instance of Emperor Xi and his highly geared fiefdom – the People Republic of China – there is less allure than some think.
The topic is credit. And the conclusion is that the Chinese banks (shadow or otherwise), insurance companies and mutual companies have grown at such an eyewatering rate that a deleveraging is inevitable. The question now is what type of deleveraging will it be. To put it in Ray Dalio vernacular: will it be beautiful; or will it be gruesome.
There is much to unwind. In 2016, Chinese banks expanded their loan books by 16.5%, and that is not from a small base. Even if a single bank grew that quickly it would raise concern. The sheer magnitude of the Chinese banking system is hard to comprehend. It is almost, quite literally, unbelievable. As of December 2017, assets in Chinese commercial banks totalled US$40 trillion, or around 50% of world GDP. For perspective, U.S. commercial banks totalled circa US$13 trillion. This means that Chinese banks have created more assets in the last few years than the USA has in the last century. If banks add another 16.5% to their book this year, that is around $6 trillion in loans.
One question therefore is: how can a $13 trillion GDP economy make effective use of $6 trillion of lending in a year? Anne Stevenson-Yang has some insight: “[having come to] the end of their ability to find investment projects, some cities have adopted a strategy of destroying new but unused buildings and public facilities in order to make room for more, since construction adds to GDP”.
In the same way that the laws of physics resolve the issue when two high-speed objects attempt to occupy the same space and time simultaneously, so too will the laws of finance resolve the intractability of a $40 trillion banking system growing at 16% in a $13 trillion economy.
President for life? Be mindful of your timing.
