Credit problems in China

August 8th, 2010

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Last Friday, we asked our readers: Do you think China will crash soon? The results are pretty interesting. Almost 29% of you reckon that China will crash in a few years time. Almost the same number reckon that China will not crash as far as the eye can see. The rest are scattered throughout the other response. From what we can see, most of you do not think that China will crash anytime soon.

Today, we will talk about credit in China?s banking system.

In Western countries, central banks cannot force the private sector to borrow.  As we wrote in What makes monetary policy ?loose? or ?tight??,

To understand why, we have to remember that the central bank cannot control the demand for money and credit. It can supply whatever amount of them that it wants, but it cannot force business and people to desire them. Put it simply, you can lead a horse to the water, but you cannot force it to drink.

Apparently, this is not so in China. The Chinese government, which has greater administrative powers than Western governments, can force feed credit into the economy. The result: bad debts.

Professor Patrick Chovanec, professor at Tsinghua University’s School of Economics and Management in Beijing, has concerns about the Chinese banking system. He wrote two articles detailing its weaknesses:

Chinese Banks At Risk, Part 1
Chinese Banks at Risk, Part 2

The question is, can there be a Western-style credit crisis in China?

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  • Ted

    The people over at zerohedge appear to think that a Western-style crash is imminent in China, as the following article illustrates:
    http://www.zerohedge.com/article/observations-c

    On the other hand, Jim Sinclair and Jim Rogers would beg to differ. I guess we have to wait and see.

  • Interestingly… our guess is that China wouldn't crash in the deflationary sense. Instead, we believe they would 'crash' more on the inflationary sense. That could explain why they're encouraging its citizens to invest in gold?