The problem with coattails

China, not doing as awesome as everyone thought.

Yes, the US faces a debt hangover, but so does China after the state banks let rip with private loans keep the boom going through the downturn. Fitch Ratings has just downgraded China’s debt, warning that credit has jumped from 125pc to 200pc of GDP over the last four years, with mounting reliance on shadow banking that lets banks circumvent loan-to-deposit curbs. This is why George Soros has been warning that there could be a “run” on China’s state banking system akin to the Lehman bust.

Total credit has jumped from $9 trillion to $23 trillion in four years, an increase equal to the entire US banking system.

America has moved in the opposite direction. Its banks now have loan-to-deposit ratio of around 0.7, and the biggest safety buffers in three decades. The Congressional Budget Office says US Treasury debt held by the public has jumped from 40pc to 73pc.

While I wonder if America has the wherewithal to actually pay down our debt, at least we are (fairly) transparent about it.  Recognizing the problem is the first step, right? China has to liberalize or die. It will be interesting to see which they choose. And if America does collapse, China will provide us with a nice cushiony buffer, like we did for Europe after WWII


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