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The China Credit Crisis, Part 2

NEW YORK (TheStreet) -- Last month we saw the start of a very important credit crisis in China. Lending has come to a standstill. This means that most short-term loans to businesses cannot be rolled over. There will be massive corporate defaults. Even worse is the repercussions on individual savers.

About $10 trillion of loans are in the "shadow" banking system. This is largely financed by individual savers who want to get a higher return than is available on savings accounts. It's probable that most of these loans will go up in smoke. That will be devastating for the savers, and will have significant economic repercussions.

This crisis is still largely ignored by market commentators in the U.S. It's treated like a small thunderstorm in the summer. Analysts still cite the fictitious 7.5% GDP growth number from the government, although all the evidence suggests to me that the private sector in China is now in recession.

Wait until Wall Street wakes up to that reality! Most people didn't believe us in 2007 when we warned of a monumental credit crisis to occur the following year. It happened.

It's human nature to deny reality when it is extremely unpleasant. Denial is what is happening now about the China situation.

Normally a credit crunch is the result of one or more of the following:

  1. A shortage of lendable funds,
  2. Governmental lending restrictions, or
  3. Banks being unable to find creditworthy borrowers,
  4. All of the above.

The June liquidity shock in China came from the realization that the government was no longer willing to provide infinite liquidity. In fact, it is trying to get control over the unregulated shadow banking system.

The bulls say China is not having a credit crisis because its money supply (M2) growth in May was up 15.8% compared to one year ago. They say that since there is plenty of money growth, there is no credit crunch.

But a credit crunch means that no one can get credit, even other banks. The growth of the money supply does not determine whether or not there is a credit crunch.? The availability of credit depends on confidence of the lenders.

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