Is a Financial Crisis Around the Corner?
In 2008, all it took was a handful of investment banks to throw the entire world into recession. Imagine what a Chinese financial crisis could do.
Unfortunately, a famous billionaire and short seller doesn’t think we’ll need to imagine it for much longer. Jim Chanos, the man who unearthed the Enron scandal, thinks China is on the brink of an economic collapse that will make 2008 look like a warm-up. (Source: “Jim Chanos: China’s balance sheet looks a lot like U.S. banks in 2008,” Acast, May 22, 2016.)
His argument is fairly simple: China is making the same mistakes as the West, but on a much bigger scale. It’s hard to disagree with him when you look at the amount of Chinese debt in the world. The country is on thin ice.
“We’re getting into some really scary debt-to-capital kind of numbers in China right now,” said Chanos on Business Insider’s Hard Pass podcast. “[They’re] at 300% of GDP [gross domestic product] as opposed to 100% of GDP the last time they had a big problem.” (Source: Ibid.)
This level of borrowing makes it difficult for China to avoid a financial crisis because unlike the United States, China doesn’t just bail out the banks. The country bails out everything.
Let’s not forget that China is still a communist nation. There are tons of state-owned enterprises that the government would never let fail, so instead of letting the market work its magic, China saves them from financial ruin.
But this type of socialism is doomed to fail. Chinese banks would have to borrow even more money to prop up their economy. They’d pay off debt with…you guessed it, even more debt, perpetuating a cycle that can only end in disaster.
But here’s the worst part: China’s economic collapse could start a chain reaction around the world. It is the biggest player in trade and manufacturing, meaning its financial crisis would hit commodity-rich countries in South America and Africa.
“Any country whose prime export market is China, which tends to be the commodity exporters…represents 40% of global GDP,” Chanos said. “If China really does go into a decline, then you’re going to see an awful lot of other countries be dragged down with it.” (Source: Ibid.)