China Cracks Down

Not only has China instructed banks to trim down the lending and check their risk-levels, China is now nullifying loan guarantees made by local governments. If loans guaranteed by local governments are bad, the lenders are on their own.

With bridges to nowhere and empty cities being built all over the country, sooner-or-later China could go through what I might call “Financial Crisis Redux”. Of course, a crisis could take years or decades to develop.

Just like the 2008-2009 US crisis, it could look something like this:

Real asset crash –> Financial asset crash –> Financial institution crash –> Bailouts

Your typical, plain vanilla financial crisis.

Here’s a comment from a recent Bloomberg article:

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”

Read more about China’s crackdown: Bloomberg

Will this crackdown prevent a crisis? Or will it trigger the crisis?

CLSA is quite bullish on China and believes that tightening will be ‘incremental’: