A Recipe for Disharmony

An Asia Times article by Martin Hutchinson paints a very sobering picture about China’s bad debt situation. The latest estimate is reported to be between US$1.2 trillion and US$1.3 trillion, which would make the often touted sovereign wealth fund of US$200 billion look almost paltry, not to mention that one-third of this fund is slated for the purchase of bad loans from Chinese banks and another third to recapitalize China Agricultural Bank and China Development Bank which are destined for privatization. What is even scarier is that, according to Hutchinson, all of China’s foreign exchange reserves, to the tune of US$1.4 trillion, might be needed to plug holes in the banking system when the inevitable liquidity crisis occurs. The article also says that China’s banking system bad debts account for about 40 percent of her GDP and are in real terms about five times those of the United States, given her economy is around one-fifth the size of the latter’s.

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