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China has a massive nonperforming loan (NPL) problem… and it has dire consequences for the global economy.
[A nonperforming loan (NPL) is a loan that’s in default or close to being in default. Many loans become nonperforming after they’re in default for 90 days.]
NPLs were the root cause of last decade’s global financial crisis (and the Great Recession that followed). The Federal Reserve’s low interest rate policies sparked a massive boom in the U.S. housing market. It led to a lending frenzy.
Federal loan guarantees meant anyone with a pulse got approved for a mortgage of several hundred thousand dollars.
The borrowers’ ability to repay their loans was an afterthought… leading to an $8 trillion meltdown in the U.S. stock market—and a global recession.
Now hedge fund manager Kyle Bass says China’s banking system faces a similar NPL catastrophe…
He cites the explosive growth in Chinese credit (from $3 trillion to $34.5 trillion) over the last 10 years. (Bass knows something about NPLs. In 2007, his fund earned 212% by shorting the U.S. housing market.)
The Chinese credit expansion was used for massive infrastructure programs to maintain at least 6% growth in China’s annual gross domestic product (GDP). The problem is most of this credit fueled epic malinvestment… from entire “ghost cities”… to unneeded bridges… to (unused) deep-water ports.
Now Bloomberg reports as much as 22% of China’s outstanding credit (worth $614 billion) may be nonperforming by the end of the year. The country’s official “bad loan” number in March was just 1.75%. The enormous spike means massive disruption for the global economy ahead.
In an emergency move, Reuters reports, the Chinese central bank is setting up rules whereby the lending banks will convert their nonperforming loans into equity in the firms they lent to. They hope this will shore up banks’ balance sheets and prevent the financial system from seizing up.
But French bank Societe Generale estimates total Chinese banking losses could hit over $1.2 trillion. That’s more than 60% of the banks’ capital… 50% of fiscal revenues… and 12% of China’s entire GDP.
Bass says a massive devaluation of the Chinese currency (the yuan) is coming to “paper over” their huge NPL issue. He’s right…
Longtime Daily readers know Tom’s said further Chinese currency devaluation is inevitable. He calls it “Flashpoint No. 1” for a potential crash in 2016.
On January 7, the Chinese weakened the yuan by 0.5% against the dollar. They were trying to stem a 40% crash in their stock market. It sent the U.S. market tumbling to its worst start in history.
But China’s NPL problem will make that look like a tiny bump in the road…
Bottom line: When China’s NPL crisis hits, the entire global financial order will quake. The U.S. dollar will surge and the world will continue its slide toward deflationary depression.