- “It’s Coming To A Head In 2016” – Why Bank of America Thinks The Probability Of A Chinese Crisis Is 100%
by Tyler Durden, www.zerohedge.com
Some sobering words about China’s imminent crisis, not from your friendly neighborhood doom and gloom village drunk, but from BofA’s China strategist David Cui.
Excerpted from “2016 Year-Ahead: what may trigger financial instability“, a must-read report for anyone interested in learning how China’s epic stock market experiment ends.
A case for financial instability
It’s widely accepted that the best leading indicator of financial instability is rapid debt to GDP growth over a period of several years as it’s a strong sign of significant malinvestment. Based on Bank of International Settlement’s (BIS) private debt data and the financial instability episodes identified in “This time is different”, a book by Reinhart & Rogoff, we estimate that once a country grows its private debt to GDP ratio by over 40% within a period of four years, there is a 90% chance that it may run into financial system trouble (Table 1). The disturbance can be in the form of banking sector re-cap (with or without a credit crunch), sharp currency devaluation, high inflation, sovereign debt default or a combination of a few of these (Table 2).
As Chart 1 demonstrates, China’s private debt to GDP ratio rose by 75% between 2009 and 2014 (i.e., since the Rmb4tr stimulus), by far the highest in the world (we suspect a significant portion of the debt growth in HK went to China). At the peak speed, over four years from 2009 to 2012, the ratio in China rose by 49%.