This past week on Tuesday the International Monetary Fund issued yet another updated warning on the debt levels strangling the Chinese economic future prospects and similarly threatening the stability of the world economy. They warned that Beijing needs to address its growing debt problems and soon. This is a serious issue that has the very real potential to derail the entire global economy in the coming months and years (over what the IMF calls the medium term future).
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How Bad Is China’s Debt Bomb Today Really?
The Chinese debt situation is so bad now that the International Monetary Fund has warned recently in a new study that the enormous debt pile in China could actually be the critical trigger for the upcoming next global financial crisis when borrowing at last attains levels that are no longer sustainable. To say that the Chinese indomitable rise to global economic superpower status has faltered badly is not an over-exaggeration any more. Per the IMF’s stark warnings about the Chinese increasing levels of debt:
“The growth outlook has been revised up reflecting strong momentum, a commitment to growth targets, and a recovering global economy, but this comes at the cost of further large and continuous increases in private and public debt, and thus increasing downside risks in the medium term.”
As a salient case in point, the credit issued to the Chinese sectors that are not financial has doubled over the past five years alone. The ratio of credit to GDP skyrocketed to 230 percent as of last year, per the IMF report. The International Monetary Fund did not stop there, but drew comparisons with other similar countries which have previously been down this dangerous path (ahead of China) by increasing their growth with aggressive debt loads.
“International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment or a marked growth slowdown.”
The IMF is not pulling any punches either. They have fully revealed the enormous scale of China’s love affair with its dangerous debt. They pointed out how it required the Chinese obtaining 20 trillion yuan in new credit in order to increase the GDP of China by only five trillion yuan. Compare this to 2007 when it needed 6.5 trillion yuan in debt to achieve the same effects. Look at this chart below which shows just how quickly the Chinese debt has mushroomed over the past years:
What is more, the organic Chinese growth that was not literally debt- and borrowing-related and fueled proved to be substantially less than the recent years’ worth of rosy headline numbers have boasted, per the revealing IMF report:
“Sustainable growth — growth that can be achieved without excessive credit expansion — was likely much lower than actual growth over the last five years. “
Top of the priority list of pressing issues that China has to tackle somehow is this roaring debt level. The International Monetary Fund projects that the debt of non-financial sectors in China’s economy will rise to around 300 percent of Gross Domestic Product by the year 2022. This compares to the 240 percent figure from last year.
The IMF issued a rebuke to China’s strategy of the past decade, arguing strongly that growth which is fueled by debt is only a shorter-term solution to a problem which can not be sustained over the longer-term without China first successfully addressing deep-seated structural issues.
It is important to know that this is not the first such warning on the exploding debt levels in the Chinese economy. Economic experts have been warning about this serious problem for literally years now. They have continuously encouraged China to pull way back on their old economic growth model which focuses on taking out credit lines in order to run up spending and investments. The government must come up with a better balance between managing the economic risks and state supporting growth effectively and efficiently.
China Banking Sector Similarly Over Leveraged with Debt
In only July, the banks in China offered $123.44 billion (or 825.5 billion yuan) of new credit facilities and loans to companies. This did represent a lower amount than in June. The total financing measure of liquidity and credit in the Middle Kingdom measured around 1.22 trillion yuan for July as opposed to 1.78 trillion yuan for the month of June. On the surface, this sounds like it is heading in the right direction, but you should not be deceived.
A good portion of such a drop proves to be only seasonal in nature. This continues to “mask an uptick in underlying credit growth,” per China Economist Julian Evans-Pritchard at Capital Economics. A more accurate means of considering the creation of credit is by approximating the increase of total bank loans outstanding along with total social financing. These two categories actually grew by around 13 percent over July as opposed to July of 2016.
Spiraling Out of Control Debt Not China’s Only Serious Economic Problem
The International Monetary Fund has other warnings for the Chinese economic juggernaut. Besides addressing their spiraling out of control debt levels, they similarly must deal with many sectors which are inefficient in order to grow productivity and also have to address their overcapacity issues in other sectors. China has unfortunately become well known for its many state-owned enterprises over the past years. These have earned the unenviable name of Zombie Corporations by many global analysts who track and monitor them.
Yet the IMF had some small crumbs of comfort for the autocratic obsessive and controlling government of the Middle Kingdom. They did applaud their attempts to increase the regulation and oversight of risks to the massive financial sector, to better handle the outflows of capital from the country and economy, to reign in the corporate debt machine, and to better manage wild fluctuations in their increasingly important trading currency the yuan. In other words as the IMF sanguinely put it:
They need to channel their growth momentum in order “to accelerate needed reforms and focus more on the quality and sustainability of growth.”
These comforting words are merely a consolation when compared to the massive issues the communist government needs to address quickly.
Gold Protects Your Retirement Portfolio Prospects Against Government Debt Bombs
The IMF country report on China may not be entirely bad, but it is certainly far from being positive. Debt bombs like the ones ticking in China (as well as in the United States, Greece, and most of the Western world’s developed economies) have brought down countless economies, nations, empires, and kingdoms over the millennium, stretching back past the Roman Empire 1,500 years ago. This is why you can not count on global central bankers or finance ministers to protect the future value and prospects of your personal investment and retirement portfolios.
You have to seize your financial future entirely in your own hands. Gold is the only time-tested investment hedge and vehicle that makes this job manageable. The yellow metal has protected against runaway debt and potentially associated financial collapse by offering insurance and protection against market turbulence for thousands of years now. Get some gold today while the prices are still affordable, before everyone else starts running for the proverbial market exits and to the gold windows as well. It’s all part of the argument for why you need a gold IRA now.