A Major Bank Just Made Global Financial “Meltdown” Its Base Case: “The Worst The World Has Ever Seen”
When it comes to the epic bubble in China’s economy, it really boils down to one – or rather two – things: a vast debt build up (by now everybody should be familiar with McKinsey’s chart showing China’s consolidated debt buildup) leading to a just as vast build up of excess capacity, also known as capital stock accumulation. And/or vice versa.
It is how China resolves this pernicious, and self-reinforcing feedback loop, that is a far greater threat to the global economy than even what happens to China’s bad debt (China NPLs are currently realistically at a 10-20% level of total financial assets) or whether China successfully devalues its currency without experiencing runaway capital flight and a currency crisis.
One bank that is now less than optimistic that China can escape a total economic meltdown is the Daiwa Institute of Research, a think tank owned by Daiwa Securities Group, the second largest brokerage in Japan after Nomura.
Actually, scratch that: Daiwa is downright apocalyptic.
In a report released on Friday titled “What Will Happen if China’s Economic Bubble Bursts“, Daiwa – among other things – looks at this pernicious relationship between debt (and thus “growth”) and China’s capital stock. This is what it says:
The sense of surplus in China’s supply capacity has been indicated previously. This produces the risk of a large-scale capital stock adjustment occurring in the future.Chart 6 shows long-term change in China’s capital coefficient (= real capital stock / real GDP). This chart indicates that China’s policies for handling the aftermath of the financial crisis of 2008 led to the carrying out of large-scale capital investment, and we see that in recent years, the capital coefficient has been on the rise. Recently, the coefficient has moved further upwards on the chart, diverging markedly from the trend of the past twenty years. It appears that the sense of overcapacity is increasing.
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