I have long noted that the leverage, securitization and off-book accounting gimmicks that imploded enery-giant-ENRON in the early 2000s were adopted far and wide over the last 20 years. Bailouts to those instrumental in the 2008 implosion, along with central bank liquidity-pumping globally, enabled a continuation of similar antics in the last decade, and particularly in China.
Beneath the deadpan delivery in the segment below the numbers are truly startling: twenty to twenty-five percent bad debt in the Chinese banking system amounts to some U$ 10 trillion that could be written off and/or down to a fraction of its face value. Meanwhile owners of the paper have made the classic error of presuming it was ‘risk-free’ on the assumption that the government would hold so called ‘investors’ harmless. As the Ponzi monstrosity grows however, making participants whole becomes less possible.
The story, actors, destructive-incentives and behaviours at play here are all reminiscent of previous episodes including the 1997 Asian, and 2008 subprime, financial crises.
Charlene Chu, senior analyst at Autonomous and former senior director at Fitch Ratings, discusses liquidity pressures in China, non-performing loans, and shadow credit. Here is a direct video link.
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