China’s
credit boom is still in full swing. Total credit in the economy (total
social financing) showed a 40 per cent rise in November over the prior
month and is on course for growth this year of almost 20 per cent. It is
continuing to expand at twice the rate of nominal, or money, gross
domestic product, and according to official data has pushed the credit
to GDP ratio up to 215 per cent in 2013, and most likely more. It is
clear that banking institutions, state-owned enterprises and local
government financing vehicles have remained relatively insensitive to,
or been able to circumvent, higher interest rates and bond yields,
central government curbs on the shadow banking sector, and the rampant
real estate and infrastructure markets.
There are basically two types of recessions. By far the most common occurs when the central bank raises interest rates to slow either demand pull or cost push inflation (or both). Both developments are the result of an economy running too hot. Recovery from these types of recessions is usually fairly quick. The second type of recession is a debt-deflation recession. Here, a credit fueled asset bubble bursts, leading those who hold the asset to sell same in order to pay off the loan backing the asset purchase. As everybody does this at the same time, asset prices plunge, leaving many who have loans underwater on those loans. This leads to a painfully slow recovery -- much like the one the US has been experiencing for the last 4 years.
China has been running hot for some time -- as in years. However, inflation is not a major issue. That leaves the most probably cause of the next Chinese recession as an asset bubble bursting, leading to a debt-deflation scenario.
That does not offer my much comfort heading into 2014.
