Beijing (AsiaNews/Agencies) – China’s loose monetary policy has fuelled a dangerous credit bubble, leaving many of its firms and companies exposed. The global economy is now more than ever vulnerable to another 1930s-style bust than generally understood.
The Basle-based Bank for International Settlements (BIS), the ‘central banks’ central bank,’ warns that the current situation is similar to the one that led to the Great Depression in the 1930s and the economic slump that hit Japan and South-East Asia in the early and late 1990s
“Each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", the bank said.
The BIS pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.
Tail events affecting the global economy might at some point have much higher costs than is commonly supposed.
Making matters worse, China’s economy shows very similar, disquieting symptoms—it is repeating many of the same disastrous errors made by Japan in the 1980s when there was an asset boom, and "massive investments" in heavy industry and Tokyo let credit balloon.
Letting asset bubbles build up to be "cleaned up" later failed in the United States in 1930 and in Japan in 1991 because debt and investment became excessive.
Some 40 per cent of China's state-owned enterprises are loss-making, surviving only on borrowed money. This exposes the banking system to great risks in a downturn when many loans will be a write-off and there will be even greater pressures for soft loans to continue to prop up unprofitable firms to avoid bankruptcies.
Even if cutting interest rates in such a crisis might help, it will have the effect of transferring wealth from creditors to debtors.
Borrowing a line from Chinese premier Wen Jiabao, the BIS report concludes that China's growth is "unstable, unbalanced, uncoordinated and unsustainable",
Beijing is aware of the problem and has been trying to reduce monetary supply but its actions like increasing interest rates have had little impact because other measures (like financing money-losing companies) have the opposite effect.
The country’s economy has been running for years at a growth rate—10 per cent—that cannot be sustained. So far its success has been based on cheap labour, i.e. on the systematic exploitation of workers (low and often unpaid wages, poorly-paid child workers, virtual slavery in some cases like Shanxi brick kilns and unsafe working conditions); on complete disregard for the environment with little concern over pollution and its effects; and extensive land seizures in the countryside for industrial development which have caused widespread rural unrest.
But China’s problems are also the world’s problems, especially since new financial products (derivatives, high yield speculative funds, collateralized debt obligations and other such financial instruments), market liberalization and globalization have created an unprecedented credit bubble. The total volume of transactions is 50 times the world GNP. Should the bubble burst as it did in the past most people will come out impoverished with wealth further concentrated in the hands of the few.