The REAL Reason China’s Economy Is Crashing

China 2015 = U.S. 2008

We noted in 2009, in a piece titled “China 2009 = America 2001 = Rome 11 BC“:

One of the top experts on China’s economy – [economics professor] Michael Pettis – has a very long but interesting essay arguing that China is blowing a giant credit bubble to avoid the global downturn.

Pettis documents reports and statistics from modern China, of course. But he ends with a must-read comparison to ancient Rome:

Let me post here a portion of Chapter 15 from Will Durant’s History of Roman Civilization and of Christianity from their beginnings to AD 325

The famous “panic” of A.D. 33 illustrates the development and complex interdependence of banks and commerce in the Empire. Augustus had coined and spent money lavishly, on the theory that its increased circulation, low interest rates, and rising prices would stimulate business. They did; but as the process could not go on forever, a reaction set in as early as 10 B.C., when this flush minting ceased. Tiberius rebounded to the opposite theory that the most economical economy is the best. He severely limited the governmental expenditures, sharply restricted new issues of currency, and hoarded 2,700,000,000 sesterces in the Treasury.

The resulting dearth of circulating medium was made worse by the drain of money eastward in exchange for luxuries. Prices fell, interest rates rose, creditors foreclosed on debtors, debtors sued usurers, and money-lending almost ceased. The Senate tried to check the export of capital by requiring a high percentage of every senator’s fortune to be invested in Italian land; senators thereupon called in loans and foreclosed mortgages to raise cash, and the crisis rose. When the senator Publius Spinther notified the bank of Balbus and Ollius that he must withdraw 30,000,000 sesterces to comply with the new law, the firm announced its bankruptcy.

At the same time the failure of an Alexandrian firm, Seuthes and Son due to their loss of three ships laden with costly spices and the collapse of the great dyeing concern of Malchus at Tyre, led to rumors that the Roman banking house of Maximus and Vibo would be broken by their extensive loans to these firms. When its depositors began a “run” on this bank it shut its doors, and later on that day a larger bank, of the Brothers Pettius, also suspended payment. Almost simultaneously came news that great banking establishments had failed in Lyons, Carthage, Corinth, and Byzantium. One after another the banks of Rome closed. Money could be borrowed only at rates far above the legal limit. Tiberius finally met the crisis by suspending the land-investment act and distributing 100,000,000 sesterces to the banks, to be lent without interest for three years on the security of realty. Private lenders were thereby constrained to lower their interest rates, money came out of hiding, and confidence slowly re-turned.

Except for the exotic names … and the spice-bearing ships, this story has a remarkably contemporary ring to it, as do nearly all historical accounts of financial crisis, by the way. This story is not totally relevant to China today except to the extent that it indicates how difficult it is for banking systems flush with cash to avoid speculative lending, and how the very fact of their speculative lending then creates the conditions that can bring the whole thing crashing down. Hyman Minsky told us all about this kind of thing. There has never been a political or economic system in history that has been able to avoid the consequences of excessive liquidity within the banking system. Even the Romans learned this, and they learned it the hard way, as we always do.

America’s easy credit bubble started in 2001. Rome’s prior to 10 BC. We know the results of both.

Is China now blowing a huge credit bubble which will lead to a giant crash down the line?

Pettis thinks so …

Last week, economics professor Steve Keen explained:

[During the 2008 crash] private debt [in China] was effectively constant at 100% of GDP.

All that changed after the financial crisis. In just 6 years, private debt grew by over 80% of GDP—and that’s using official figures as submitted to the Bank of International Settlements (see Figure 2) when there’s every reason to expect that this particular figure is likely to understate the actual level.

Figure 2: Private debt in China exploded as it sidestepped the Global Financial Crisis


Why does the level of private debt in China matter? If you believe conventional economics and finance theory, it doesn’t—which is why I find myself having to repeat the (expletive deleted) obvious so often that it does. [Background.]


From 2009 on, growth in private credit went into hyperdrive as a deliberate government policy to boost the economy.

Figure 3: China avoided the Global Financial Crisis by boosting credit growth



In 2010, the increase in private debt in China was equivalent to 35% of GDP. That dwarfs the rate of growth of credit in both Japan and the USA prior to their crises: Japan topped out at just over 25% per year, and the USA reached a “mere” 15% of GDP per year—see Figure 4.

Figure 4: China’s credit bubble is the biggest ever


As I have argued for a decade now, crises begin when the rate of growth of credit slows down in heavily indebted countries. China was not heavily indebted in 2008, which is why it could take the credit growth path out of the Global Financial Crisis. But now it is more heavily indebted than America was when its crisis began—even relying on official statistics which undoubtedly understate the real situation—and the momentum of debt may well carry it past the peak level reached by Japan after its Bubble Economy collapsed in the early 1990s (see Figure 5).

Figure 5: China is on course to reach Japan’s Private Debt to GDP peak



So China is having its first fully-fledged capitalist crisis. To date its response to it has been to try to sustain the unsustainable: to transfer the bubble from housing to the stockmarket, and to keep the stockmarket rising like some production target for wheat from the bad old days before the fall of the Gang of Four. It can’t be done. At some point, the Chinese government is going to have to make the transition from generating a credit bubble to trying to contain its aftermath.

And economics professor Michael Hudson notes:

Most of the Chinese stocks went down because small Chinese investors were borrowing from, let’s say, the equivalent of payday loan lenders to buy stocks. There was a lot of small speculation in Chinese stocks pushing it up.


In China, it’s largely small borrowers who borrowed from intermediate lenders, that have borrowed from the big banks. So a lot of individuals in China that tried to get rich fast by riding the stock market all of a sudden find out that they have a lot of debt to intermediate, you know, non-bank lenders, insiders, people who banks will lend to. It’s like the British banks lending to real estate speculators to lend out to homebuyers. So this is essentially the attempt to get rich by riding the stock market in China went way overboard. Chinese stocks are still above what they were at the beginning of the year. This is not a crisis. This is not very much. It’s just that the artificial increase in the market has now ended some of the artificial push-up. And it’s still artificial, and it will still go down some more.

For confirmation that individual Chinese investors borrowed too much to buy stocks – leading to a bubble which inevitably had to burst – see this, this, this and this.

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  • diogenes

    This makes interesting reading but the initial citation is a bad joke, a hoax, as historiography — a cartoon. The paragraphs by Will Durant have “a remarkably familiar ring” because they were written in the early 1930s. They are a fantasia with Roman names based loosely on events of 1928-1933. There isn’t a shred of historical fact about events in Rome in the lot of we. We have NO EVIDENCE WHATSOEVER of these kinds of details. They are the sheerest fiction. More, the scenario envisioned betrays a fundamental ignorance of or obliviousness to the actual conditions of the time. It took weeks for “news” to travel from Lyons to Rome, months from Byzantium. Rome did have a well-attested long-term problem of gold draining to the Levant and eastward, both in trade and through “moneylending” and “currency-exchange” (gold & silver) operations, but its economic effects were felt over decades, not as a sudden “crisis.”

    • jadan

      Well said. It is also assumed that credit expansion is bad, when in fact there is no other way to stimulate an economy. A bubble develops when new money is used for speculation in a financialized economy such as the US. China’s credit expansion is chiefly for creating jobs to keeps its population employed, either in the private domain or in public infrastructure. Bubbles are made of paper. Much or most of China’s credit expansion is made of concrete and other tangible stuff.

      • Lord High Wulfenstraat

        The comparisons are adroit…if they can be adroit and flimsy at the same time. Two points to make on all the money that we owe China, which should relieve everyone’s mind but the Chinese.

        Number One: As of September 2014, foreigners owned only $6.06 trillion of U.S. debt. The American public holds the rest of that debt, which is approximately another $13 trillion. In fact, we owe it to ourselves. And China only holds a percentage of our foreign debt. Consequently, we don’t owe our soul to China. We owe it to Americans who hold the bulk of our debt.

        Number Two: According to Paul Krugman, the famed economist, “It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors.”

        If your image of America is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction. We hold the keys to the safe. We don’t make mistakes. And we’ll let the stock market drop and drop and drop until we’ve bankrupted the Chinese war machine. It’s far better to fight a war this way, where our pocketbooks get lighter, than fight a war where our children die under heavy shelling or in nuclear conflagrations.

        Yes, we’re about ready to hit hard times in the US, but it’s lots better than fighting a hot war. So, just relax. Factories will close and unemployment will rise and the stock market will hit new lows…but the Chinese will be stopped from becoming a global hegemon, to whom you would pay tribute if we lost the war.

        In fact, we’re betting on China splitting apart with the strategies we’ve instituted, including the breaking apart of the Han strongholds into the cultural and industrial watersheds of the Yangtze River, the Yellow River and the Pearl River…with each having a more manageable population approximating the size of the United States. And the present colonies of the PRC will rise as the new countries of Tibet, East Turkestan, United Mongolia, Manchuria, Macau and Hong Kong. Likewise, Taiwan will re-enter the United Nations as its own independent country, without ties to the mainland.

        And that’s that, with a more economically and militarily balanced Asian community of nations. Let’s not forget that it’s not Obama or Congress running this show. They’re only for show, only for blame. They’re the whipping boys whose hands are too often caught in the till. And we don’t live in a real democracy where the people actually rule That’s just more theater. The real rulers are far smarter, more agile, and entirely commonplace…just like the invisible hand of the market.

        • Brockland A.T.

          We all know how well plans to redraw the map of the Middle East is working out.

          It all boils down to MacKinder’s heartland theory. Right now, Fortress North America is united, and if not sound, its still, well, united and the only major geographical pivot that is so under bankster control.

          For the bankster class, at all costs, the ‘world island’ of EurAsia/Africa must never unite, so smash the first major blocks of a eurasion pivot, Russia and China. Even if under Anglo control, the mechanism of unity could separate from them. They thought they had Russia; Putin showed them otherwise.

          The degree of Balkanization is the key scorecard for tracking who’s winning.

          • Here is my small contribution with a small sampling from my personal files please enjoy store and share patriot!

            (Jan.1998) US history – “How Jimmy Carter I Started the Mujahideen” – Zbigniew Brzezinski, National Security Advisor 1977-1981

            “Q: The former director of the CIA, Robert Gates, stated in his memoirs [“From the Shadows”], that American intelligence services began to aid the Mujahadeen in Afghanistan 6 months before the Soviet intervention. In this period you were the national security adviser to President Carter.


            Zbigniew Brzezinski Taliban Pakistan Afghanistan pep talk 1979

            In 1979 Carters National Security Advisor, Zbigniew Brzezinski went into Pakistans border regions with Afghanistan to give a little pep talk to some prospective majehadeen (Holy Warriors).

            In a 1997 interview for CNN’s Cold War Series, Brzezinski hinted about the Carter Administration’s proactive Afghanistan policy before the Soviet invasion in 1979, that he had conceived.


            General Wesley Clark: Wars Were Planned – Seven Countries In Five Years

            “This is a memo that describes how we’re going to take out seven countries in five years, starting with Iraq, and then Syria, Lebanon, Libya, Somalia, Sudan and, finishing off, Iran.” I said, “Is it classified?” He said, “Yes, sir.” I said, “Well, don’t show it to me.” And I saw him a year or so ago, and I said, “You remember that?” He said, “Sir, I didn’t show you that memo! I didn’t show it to you!”


            General Wesley Clark Asked About 7 Country War Plan


          • Lord High Wulfenstraat

            When the US economy starts to slow, we speed it up by going to war.

            China has trillions of dollars in the bank. It can waste billions trying to support its stock market, as it has already done. Or, it can do what we do and put its populace to work in factories producing war materiel to use in a war with Vietnam. What else does China get from such a war, besides improving its economic picture and keeping its nationalistic populace concentrated on the enemy outside and not on the CCP inside its borders?

            Prestige in defeating an enemy that the US could not. Territory that allows its navy, using Cam Ranh Bay, to escape the First Island Chain. Oil and gas (overland transit as well as resource) that allows it to free itself of Malacca Strait restrictions. Yeah, it’s Vietnam that is about to be overwhelmed by Chinese hordes before the US consolidates a protective treaty over our former enemy.

  • This article surly fits here! February 6th, 2015 Global debt rose $57 trillion since 2007; economic implosion now unavoidable

    The figures are as remarkable as they are terrifying. Global debt – defined as the liabilities of governments, firms and households – has jumped by $57 trillion, or 17pc of global GDP, since the fourth quarter of 2007, which was supposed to be the peak of the bad old credit-fuelled days. In 2000, total debt was worth 246pc of global GDP; by 2007, this had risen to 269pc of GDP and today we are at 286pc of GDP.

    So what, exactly, is going on in the global economy? The one big lesson from the bubble days was that we had too much debt. Yet fresh figures from McKinsey examining 47 of the world’s most important economies show that the situation has become worse rather than better. In net terms, there has been no deleveraging – in fact, economies have levered up further.

    • Lord High Wulfenstraat

      Hey, Molon, when the US economy starts to slow, we speed it up by going to war.

      China has trillions of dollars in the bank. It can waste billions trying to support its stock market, as it has already done. Or, it can do what we do and put its populace to work in factories producing war materiel to use in a war with Vietnam. What else does China get from such a war, besides improving its economic picture and keeping its nationalistic populace concentrated on the enemy outside and not on the CCP inside its borders?

      Prestige in defeating an enemy that the US could not. Territory that allows its navy, using Cam Ranh Bay, to escape the First Island Chain. Oil and gas (overland transit as well as resource) that allows it to free itself of Malacca Strait restrictions. Yeah, it’s Vietnam that is about to be overwhelmed by Chinese hordes before the US consolidates a protective treaty over our former enemy.

      • August 26th, 2015 The Age of Imperial Wars

        2015 has become a year of living dangerously. Wars are spreading across the globe. Wars are escalating as new countries are bombed and the old are ravaged with ever greater intensity. Countries, where relatively peaceful changes had taken place through recent elections, are now on the verge of civil wars.

      • Know and share this information with other patriots!


        Following the revolution, the US Government actually took steps to keep the bankers out of the new government!

        “Any person holding any office or any stock in any institution in the nature of a bank for issuing or discounting bills or notes payable to bearer or order, cannot be a member of the House whilst he holds such office or stock.” — Third Congress of the United States Senate, 23rd of December, 1793, signed by the President, George Washington

        But bankers are nothing if not dedicated to their schemes to acquire your wealth, and know full well how easy it is to corrupt a nation’s leaders.

        • Lord High Wulfenstraat

          What is really happening? We all know that the Chinese economy is strong and, though suffering through growing pains, will survive to prosper the world as never before…but not in its present
          incarnation. No, the end is coming, but it is the CCP whose end is
          coming, as will be evident in the events of October, 2015.

          And so begins the dissolution of the PRC into the Yangtze People’s
          Republic, the Yellow River Federation, the Pearl River Union, Tibet,
          East Turkestan, United Mongolia, Hong Kong, Macau and Taiwan. Why?
          Because the PRC is just too big and cumbersome to be held together.
          There are profits to be made and non-profitable centers to be
          liquidated. Beijing won’t do it.

          But these new countries can, which will be born shortly after the Battle of the Senkakus, slated for 2017.

  • Jazy

    Well some people predicted it, and told that China economy is a big soapbubble. Guys from freelancehouse wrote about that before.