Trend: The problem of bad loans, and attempts to cover up the problem, threaten to undermine the economy in China and affect all institutions with loans in China.
Gary Halbert, president and CEO of the ProFutures companies, describes the reasons he recommends against investing in China in the next few years.
...there are no good options for China over the next several years. With their economy surging at 9-10% or higher per annum, China risks an inflationary spiral, and as we all know, that will not end pretty. On the other hand, if the Chinese authorities raise rates enough to slow down their red-hot economy, they could well face a banking and financial crisis. Either way, China faces a tough situation over the next few years!
While the Chinese authorities have taken baby steps toward slowing the economy slightly, such as the recent increase in the bank reserve requirement, it would appear that the authorities are not willing to slow the economy significantly to reduce the threat of inflation. With the political threat of a recession, and a possible banking crisis, the authorities appear willing to let the red-hot economy continue. This means the bad loan problem will only get worse.
... a major problem in China -- whether it be soaring inflation or a banking crisis -- will be very bad news for the US and the West.
...most of the major Western banks and financial institutions have large investments in China, some or many of which may be in non-performing or under-performing loans of various types. It remains to be seen how they will deal with the valuations of such loans in light of the recent reports from Ernst & Young, Price Waterhouse Coopers, McKinsey Global Institute and Fitch Ratings.
The bottom line is, the risks of investing in China now are very high in my opinion and that of Stratfor. Even BCA, which tends to be more optimistic, has closed out all of its clients' positions in the Chinese equity markets.
... there is certainly the possibility that the wheels could fall off of the "Chinese miracle." If that happens, the Chinese stock markets could go into a multi-year nosedive, much like we saw in Japan in the 1990s, or even worse. I also believe a meltdown in China could send the US and Western equity markets into a bear market as well.