Tags: Sharma | China | debt | GDP

Morgan Stanley’s Sharma: China Faces Debt Crisis

Tuesday, 26 Feb 2013 12:14 PM

By Dan Weil

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While the debt woes of Europe and the United States are occupying center stage now, the debt problems in China are receiving little attention.

But they are huge, says Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management.

“Since 2008, China's total public and private debt has exploded to more than 200 percent of GDP [gross domestic product] — an unprecedented level for any developing country,” he writes in The Wall Street Journal.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

“Yet the overwhelming consensus still sees little risk to the financial system or to economic growth in China. That view ignores the strong evidence of studies launched since 2008 in a belated attempt by the major global financial institutions to understand the origin of financial crises.”

The crucial issue is the rate of increase in debt, especially private debt, which in China includes local governments and state-owned corporations, Sharma says.

“On the most important measures of this rate, China is now in the flashing-red zone.”

The Bank of International Settlements determined that if private debt as a share of GDP accelerates to 6 percent higher than its trend over the previous decade, this is a signal of serious financial distress, Sharma writes.

In China, that ratio is now 12 percent above its previous trend, exceeding the peak acceleration before the credit crises in Japan (1989), Korea (1997), the United States (2007) and Spain (2008), he explains.

Moreover, the International Monetary Fund found that if private credit grows faster than the economy for three to five years, this is also a signal of financial distress.

In China, private credit has been growing faster than the economy since 2008. Additionally, the ratio of private credit to GDP has risen to 180 percent, which is similar to what the United States and Japan experienced before their most recent financial crises.

Meanwhile, in what may be a positive sign for the world’s second biggest economy, China is ignoring retirement rules to keep liberal-minded Zhou Xiaochuan as head of the central bank.

That indicates new Communist Party chiefs want to intensify economic reform, Reuters reports.

People's Bank of China officials tell the news service that Zhou is the strongest voice for reform in the battle against entrenched interests.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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