By Charles Thorngren
China, a leading engine of global economic growth, has lost its steam. But a new report indicates the Middle Kingdom is now choked by record levels of corporate debt -- signaling mounting risk of a Chinese banking crisis.
And what could potentially augur a global economic downturn, or collapse.
For investors, a tumble by the world’s second largest economy would not only pop what many analysts consider to be an inflated stock market bubble. It could lead to an upset in bond, real estate and other markets.
Early this year, analysts indicated that China’s economic output has slowed to a reported 7 percent, the weakest growth since 2009, with a manufacturing slide in the last six years that shows little sign of bottoming out.
But just last week, the banking industry's global watchdog warned that risks of a Chinese banking crisis had risen to a record high -- with a key gauge of stress to its banking sector more than three times above the danger mark.
The Bank for International Settlements said in its latest quarterly review that China's credit-to-GDP gap hit 30.1 in the first quarter of 2016, with a credit-to-GDP gap of 10 to be a sign of potential danger. The new gap was the highest for the Asian powerhouse since 1995.
A year ago, its borrowing-to-gross domestic product spread was 25.4.
The gap is the relation between borrowing and the size of the economy, then comparing that with its long-term trend. When the two begin to diverge, the BIS argues, a banking crisis could be looming.
A blow-out number means excessive credit growth. And that a financial bust may be on the horizon.
China's $26-trillion pile of public and private debt is a threat to the global economy. By some estimates, its borrowing to pay for its economic boom has quadrupled in seven years.
It can reach into its deep government pockets to prop up its borrowers and prevent defaults. This may mean recapitalizing its banks because of bad loans that may be greater than the official tallies.
This could leave it mired in bad debt and years of stagnation.
At the same time, state control over the financial system and limited overseas debt may hedge against the risk of a banking crisis. In a financial stability report published in June, China’s central bank said lenders would be able to maintain relatively high capital levels even if hit by severe shocks.
China's total borrowing soared to an estimated 247 percent of GDP at the end of 2015, from 164 percent in 2008, according to Bloomberg. That’s faster than the increase in the U.S. and U.K. in the run-up to the 2008 financial crisis.
Either way, China’s debt bomb has worried moneymen and -women across the globe. In the first quarter, China’s debt gap exceeded those of 41 other nations and the euro zone. That may bode ill for the Chinese economy after a build-up in corporate leverage since the Great Recession.
For this reason, we at Noble Gold recommend a highly diverse investment portfolio.
And that means including physical gold, a gold IRA or other precious metals -- considered the ultimate safe haven during economic slowdowns and global uncertainty.
During the stagflation of the 1970s, gold began the decade at $35 and closed at $512, a 1,360 percent gain.
This year, it rose nearly 26 percent in the highest run-up in decades, from $1,060 an ounce on January 1 to more than $1,300. At the same time, silver rose a staggering 38 percent, from nearly $14 to more than $19.
If the Chinese banks should fail, the world may not be far behind. So make sure any investment portfolio includes precious metals.