Former Fitch credit analyst Charlene Chu was one of the first to warn of rising risks in China’s shadow banking system. Chinese banks have been concealing risky credit in ‘off balance sheet vehicles’ (same accounting tricks that bankrupted Enron and Worldcom et al).
The chart below offers a big picture of the Chinese debt explosion since 2007 even on the understated officially reported numbers. Chu believes that bad debt in China is some $6.8tn above these official figures as the government has propped up the appearance of growth and allowed underlying problems to go unchecked. See: Prominent China bear warns of $6.8 trillion in hidden losses.
“Ms Chu said the ability to avoid recognising losses allows problems to fester for longer — and grow larger — than in an economy where actors respond purely to market incentives. “What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,” she said. “The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”