Is China The Next EU?

Is China The Next EU?
MaoNo / Pixabay

Is China The Next EU?When will China’s government banks need a bailout so the economists that have been forecasting this for years will finally be right? When will China’s housing market finally collapse? The answer is, nobody knows because China is a closed economy and will not tell the market anything it doesn’t want the market to know.  For every article about non-performing loans, there is another quoting a government officials saying they’d pay the bills themselves if the debt become toxic. For every article about the housing market looking like it’s heading the way of Las Vegas real estate, there is a string of data from China showing that housing prices are still higher than they were a year ago.  There is no free fall in China. There is no crash. But everyone is wondering if China is the next EU. The den of China bears has roared back to life this week after being quiet for a few weeks.

In The New York TimesPaul Krugman wrote on Monday that China is possibly on the verge of becoming the next world crisis. Why? Because “there was rapid growth in credit – with much of that growth taking place not through traditional banking but rather through unregulated ‘shadow banking’ neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting – and there are real reasons to fear financial and economic crisis.”

Americans heard the same thing in 2007 and 2008, that a shadow derivatives market was going to destroy the U.S. economy.  The thing is, there is no shadow derivatives market.  Derivatives exist. Self-regulatory agencies exist to make the laws of trading them. There was, and is, no shadow. The only shadow would be a black market, which is criminal, and maybe akin to watching the Medellin drug cartel go bankrupt. It won’t take down Columbia. It won’t take down the investment banks where that money was held. (Maybe I’m misunderstanding something here, which is probably the case.)

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