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Moody's downgrades China; warns of fading financial strength as debt climbs

By John Ruwitch and Sue-Lin Wong

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No problem. Just print yuan, right. Consequence free solution.

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""China's debt is mostly domestic," it added. "And our leverage is supported by a high deposit rate (at around 50 percent), (so) the possibility to trigger systemic risks is relatively low.""

This is what is known as "whistling in the graveyard." You know, if you live long enough, you get to see the same patterns repeated over and over. It is never exactly the same, but commentators make surprisingly similar comments, and people believe them in pretty much the same way. Everyone wants to say that it is different this time, but it isn't.

China has been painting itself into a corner for about a decade now, and the painting has gotten more frantic. The xenophobic rhetoric and military bluster are also good indicators of what is REALLY happening there.

Anyway, the statement above is interesting to me because Chinese observers apparently believe that systemic risks are all foreign somehow. As their returns on capital diminish to zero, of course their savings rates will go up. What else are people going to do with their money? The rising debt levels might be signalling that people are starting to risk other people's money, not their own, and they are getting ready for old age and foregoing current consumption. Without a floating exchange rate, there is no cushion from monetary policy or terms of trade.

No. The systemic risk is extremely high. Extremely. Their attempts to insulate their economy have sealed the economy up into a little box that can't stabilize itself. The smart money is leaving China. How can that be a good sign?

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This is the part that is the most scary.

Government-led stimulus has been a major driver of China's growth over recent years, but has also been accompanied by runaway credit growth that has created a mountain of debt - now standing at nearly 300 percent of gross domestic product (GDP).

Basically their growth is based on debts meaning without debts there will be no growth.

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China doesnt face the risks of the US in 2008 or Japan in 1992, because its banks are state-owned and controlled and its regulators dont much tolerate shadow banking.

I pointed this out 2 summers ago, when the FT and everyone else was predicting a possible financial crisis from the stock plunge. I was right then, of course, and I'm right now. The real economy will probably slow somewhat, but that's about it.

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I hope you made some cash out of that prediction

And going through KIX todayI was pleasantly surprised at the low number of Chinese tourists. It made my security check effortless.

Could tourism be the first casualty ?

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Moody assessment, poor standard...next?

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Stealing and militarizing the south china sea plus the maintenance cost will surely be super super cheap

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The article is full of hints if you look for them:

"China is unique" and "China's debt is no greater in real terms than that of the US or the UK" and "rapid growth of personal debt and public debt" and "debt-financed growth" and "bank failures within three years"

The "don't worry" points all seem to say that things are different this time because reasons. And the "you should worry" points all point to trends that have been building for a long time, and which the government has not been able to solve.

This is classic. Just as sure as tariffs lead to deadweight loss, we can expect that this will not end will for the Chinese people.

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Anyone who didn't see this coming years ago was blind, China copied the Japanese formula right down to the bad loans. Anyway, if you have any investments in China, get them out now. When things go bad the CCP will get grabby, and the first thing they grab are going to be foreign assets.

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"nyone who didn't see this coming years ago was blind, China copied the Japanese formula right down to the bad loans."

Oh no, Joel. Didn't you read the opinions of the economic expert and financial writer above? He said it is different this time, and China is stronger than the US or Japan because it is more isolated. This time it is special. And you can hear that kind of talk over and over from hucksters and visionaries. Enron people said it. Dutch tulip buyers used to say it. Anyone with any vested interest, or just a prideful opinion, can think of a reason that history will not repeat itself.

But it always does, doesn't it? You and I are old enough that we have seen it all before. And when everyone else is slapping their forehead saying "How could we have known?" You and I will be sitting back laughing at all these idiots who ignored the obvious signs and similarities while looking for meaningless exceptions and justifications.

History is littered with the wrecks of proud societies that frittered their fortunes away on misguided notions. The notion that Chinese growth (which we rely on THEM to report) will go on forever is just another lie waiting to be exposed. It is quite possible that recent growth is entirely meaningless, and that "real economic growth" in China stopped years ago. Growth in the USSR went negative in the late 1970s and most people did not come to realize that until the 1990s.

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