As threats of a trade war have continued in the past few weeks, the uncomfortable truth about China’s out of control debt to GDP ratio has emerged. In the decade since the Global Financial Crisis, this ratio has skyrocketed from 160 percent to 300 percent. The country’s banking system is also saddled with toxic loans. A trade war with the U.S. could easily become the proverbial “straw that breaks the camel’s back.”
The deteriorating fiscal situation in China is another stark reminder of why you need a gold IRA today. Gold protects in times of financial market crisis as it has for thousands of years now. You should start looking seriously into what gold goes in an IRA before the financial situation in China deteriorates any more.
Looming Trade War Threatens Significant Damage to China’s Economy
The last threats in the building trade war were a Chinese tariff on sorghum for 178.6 percent. President Trump’s latest threat was to erect tariffs against China over $150 billion of their export goods. These would cover a broad range of Chinese exports from cars to aircraft to solar panels. The threatened trade war with the U.S. is especially damaging to China because almost 20 percent of all their exports are sold to the United States.
Economists at the International Monetary Fund have warned that such a trade war in practice would mean that the annual economic output of China would decline by at least .5 percent. This decline could worsen as the trade war turned nastier and became longer lasting. China still relies on export amounts like last year’s $506 billion to the U.S. to shore up the world’s second largest economy. The U.S. is far better diversified, selling only $130 billion worth of its goods to China.
This chart below gives you some idea of the trade disparity between the two nations:
This is why the IMF warned as recently as January that the proposed economic growth of China at higher than 6.6 percent for 2018 is now at potential risk. China could probably outlast a smaller decline in its growth as it has increasingly relied on domestic spending to prop up the economy. Yet the country runs greater risk because of its massive government debt and toxic loans that have been growing exponentially over the last decade.
Chinese Economy Is Saddled With Massive Debt
To say the Chinese economy has become massively saddled with an enormous debt is no overstatement. In the past several years, the country’s debt to GDP ratio has massively increased by nearly double to top over 300 percent. Ten years ago it was only 160 percent. Economists and Chinese officials alike are warning of the looming dangers of a debt bubble within the financial industry that could be ready to explode. Senior Fellow David Dollar of the Brookings Institute’s John L. Thornton China Center stated:
“If you look at classic indicators like debt to GDP or corporate debt to GDP and how that’s risen over time, then there are flashing yellow lights.”
A great percentage of these loans were issued in order to pay for infrastructure projects. These did boost the economy notably. From years 2008 through 2011, the country’s growth in GDP ranged from 9.5 percent to 10.5 percent. Yet now it is obvious that there was a price to pay for such continuous enormous building projects’ spending. Economics Professor Peter Pauly of Toronto’s Rotman School of Management explained:
“Leaps and bounds the infrastructure in China has improved, but the other side is that investment was done through a very underdeveloped monetary system. It was a wild west kind of expansion and the over-leveraging has been a result of the lack of control over the process.”
As bad as this enormous amount of debt is, this is not the only serious problem the Chinese economy is grappling with as a legacy from the last decade now.
Non Performing Loans Are a Serious Threat to China
Officials in China are warning today about a financial system in the midst of an unprecedented debt bubble waiting to explode. This has become out of control. Once the recession hit, China spent literally trillions of dollars on these enormous infrastructure projects. Numerous banks (both regulated and shadow ones) loaned out money to firms which simply could not repay their debt.
Chairman Lai Xiaoming of the China Huarong Asset Management company believes the toxic loan volume will reach an all time high of $476 billion between now and 2020. There is now a real danger that these loans will never be repaid. The Chinese banking system will then be bleeding out money massively.
Chinese Shadow Banking Industry Threatens Another Financial Crisis
The biggest single problem with the toxic loans is that no one is clear on how severe the problem actually is. This is thanks to the completely unregulated shadow banking industry. The Bank of International Settlement report warns that China is high on the list of country’s at risk of a banking crisis. This is a significant challenge for the Communist government to tackle.
The Chinese shadow banking industry is estimated to be $20 trillion large. This means that the total value of toxic loans could be even higher if the loan books of the shadowy institutions were transparent. Peter Pauly warned:
“No one knows who owes what to whom or how much. Only when it starts to go bankrupt will things start falling apart.”
This sounds eerily reminiscent of the situation in the United States banking sector a decade ago. You remember how badly that ended. This shadow banking system could easily be the biggest financial worry of the last few decades, an even bigger problem than the meltdown of the sub-prime mortgage market that powered the U.S.-led Global Financial Crisis.
A great many of these non-traditional financial institutions financed infrastructure operations that proved to be extremely risky. This included coal and copper mines and badly built buildings. They employed a range of creative financial instruments to do this. Later these financial institutions bought other banks’ bad loans. The financial institutions proceeded to package together such risky loans to sell them to consumers and back to the regulated banks.
Thanks to this years’ long process, literally trillions worth of unregulated financial products are sloshing around the Chinese economy. They now pose a huge risk that the loans will never be repaid. It could topple not only banks, but also non-financial companies and local governments who benefited from many of the loans. David Dollar put it this way:
“The global crisis was a big shock to them and they responded with a lot of infrastructure investment. They overdid it and got into investments with low returns.”
This is to say that China went to excessively great lengths in an effort to hold together their economy following the Great Recession. The problem today is that should China’s important banks begin to fail, it would create a cascading domino effect throughout the industry and economy as a whole. The failure of many Chinese banks would ultimately lead markets in Asia and around the globe into panic.
This serious set of problems in China explains why you need to invest in gold now. To do this, you will need to learn how to invest in gold first. You also need to be aware of the IRS’ Gold IRA storage requirements and options for holding the precious metals.