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Just like the debt crisis that’s brewing in Europe, you probably haven’t heard much about the massive debt crisis that’s about to boil over in Asia.
This looming threat is something that’s been lost in most people’s … and certainly Wall Street’s … blind spots. Just like the 2009 financial crisis, which rattled portfolios around the world while the people who should have seen it coming were instead shielding their eyes from it.
Since that very same crisis, the Asian banking sector has gone on a lending tear. This has been happening at the same time North American and European banks were reducing, or at least trying to slow the growth of, their outstanding loan base.
And now, because Asia took on so much lending risk, it finds itself swimming in debt.
In fact, Asian banks currently account for nearly 40% of total global assets, compared with 27% in 2009.
And get this: More than half of the 10 largest global banks as ranked by assets are headquartered in Asia. Notably in China and Japan.
Here’s one of my favorite charts that shows how Asian bankers expanded their lending practices while their compatriots in the U.S. and Europe stepped back.
Yes, the increase in debt loads across all of Asia is significant and concerning. But there’s no comparison to the potential problems percolating in China …
China: The Mystery Meat
Of the Global Economy
It’s true that no one knows for sure what’s going on in China. Any statistics that its government reports should be regarded as the mystery meat of the global economy.
But here’s what we do know …
China’s total debt is reported to have reached a stunning 258% of the nation’s total economy last year. That’s up from 158% in 2005!
Earlier this year, three of China’s large state-owned banks reported increases in their non-performing loan (NPL) ratios for 2016 — the ratio of defaulting loans out of the total outstanding.
- The Bank of China’s NPL ratio increased to 1.46%.
- The Industrial and Commercial Bank of China rose to 1.62%.
- And the Agricultural Bank’s continued to be the highest of China’s major banks at 2.37%.
But get this: Fitch Ratings recently reported that toxic loans in the Chinese financial system could be 10 times — yes, that’s TEN TIMES — larger than official estimates suggest.
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The international ratings agency said in their report that, as a proportion of China’s total loan pool, NPLs could be as high as 15% to 21%.
Compare that to “official” government-created statistics that put the overall NPL ratio for Chinese commercial banks at just 1.8%.
That’s a pretty big difference!
Solving the Bad Loan Problem
Could Make Things Even Worse
What’s more, Fitch estimates that solving China’s bad loan problem would result in a capital shortfall of 7.4 trillion to 13.6 trillion yuan (US$1.1 to $2.1 trillion). That’s equal to about 11% to 20% of China’s economy.
And the numbers get even scarier. The Fitch report goes on to warn that the capital gap could rise by another 10 to 13 percentage points by the end of 2018.
Yikes!
Recognizing that his nation has become addicted to credit, China’s President Xi Jinping and his government have made it a priority to curb excessive credit and leverage. This has caused many investors to believe that Chinese regulators have their hands firmly on the wheel of the command-and-control economy.
But not me. I am keeping a close watch on Asia. China in particular. This is NOT the time to sit back and relax.
What U.S. Investors Need to Know
If China blows up, it will likely be the catalyst for a banking crisis. And not just in Asia.
That’s the thing with banking crises. They tend to sweep across the world. That’s because all the world’s financial institutions are interrelated by a complex web of durative instruments and credit-swap arrangements, especially in Europe.
Related story: Europe’s Toxic Debt Hits ‘Urgent, Actionable’ Levels
It would take months to sort out. And longer still to see who’s still standing. In the meantime, stock and bond markets around the world would tank because of the lack of liquidity.
Only the safest most liquid instruments will trade. Economies will be devastated by the lack of access to credit and the restrictions on the flow of capital.
We would likely see a massive flight to quality. That means a big move to U.S. government paper and, most likely, gold.
That’s why I continue to have the hedges on in the Safe Money Report portfolio. My favorite is the iShares 20+ Year Treasury Bond ETF (TLT). But I’m also using the SPDR Gold Trust (GLD).
Both should protect your portfolio nicely if the toxic cocktail the Eurozone and Asia are mixing creates a second global debt crisis. A crisis that, if it hits, would dwarf the subprime blowup and send the world’s entire financial system into a meltdown … one that’s far worse than we experienced in 2008.
Come back next week, and we’ll take a deep-dive into what robots and their related algorithms mean for you and your money. And what’s more, how you should be positioning your portfolio for the next wave in the technological revolution.
Best wishes,
Bill Hall
P.S. Consider this: In 2012, there were 712 marijuana dispensaries in the U.S. Today, there are over 5,000. That’s a 600% increase in just five years. At the end of 2014, 35 edible cannabis products were legally available in the U.S. Today, nearly 600 edibles are sold legally — nearly 20 times more. And that number isn’t just growing almost by the day … the growth is accelerating wildly. Read more here about this unprecedented growth.
Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.
{ 14 comments }
Not holding my breath
If all of the major debt players print money in order to overcome their debt burden, would this not enable all economies to keep functioning without a crisis and have an equilibrium
in a global monetary platform ?
These central banks can’t create money.That would require wealth and costs and all these govts are bankrupt.They can create fiat currency,at no cost, to cover the debts.That’s what they have been doing and will continue doing,until the currencies crash in value.Who knows when that day will come?
From the looks of things, folks will be able to trade their fiat currencies in for pot. It will be the fiat currencies that go up in smoke. Pot, unless you use, will sell for gold.
True experience is the best teacher
Hi Bill………..I understand why gld is a hedge against the banking collapse, but why is the:
iShares 20+ Year Treasury Bond ETF a hedge? Seems like it’s fall alot with the banks?
Nakamoto: My take away is the same as yours regarding treasuries; and from what I read elsewhere around here, we are not the only two concerned about treasuries.
Weiss articles and views are about all that seem to hold the truth these days. Good on you and I read them carefully. I think your spot on vs all the economists that are trying to push people into the Chinese market
We are heading for a boom. Investor Pools Clubs and Real Estate Investment Trusts are the things to get into. Try your luck out with inverse ETFs too. This boom is gonna bring a lot of prosperity in this, prosperity, recession, depression, improvements economic kondratieff cycle that we are in.
These debts aren’t money debts.Central banks can create unlimited fiat currency at no cost.So,the risk isn’t the debt,it’s the value of the fiat currency.Should be very positive for money(AKA gold).
I’m trying to find a coherent strategy among the three newsletters that I value the most. With Treasuries’ yields pushing upward, prices will get creamed. Instead on going long with TLT, I’m thinking that going short with TBT might be the best long game. When SDRs replace US Dollars on the international stage, who will want our Treasury paper?
Bill, you would be wise to read Larry Edelson’s columns from one year ago. Asia is the land of 8% GDP growth and burgeoning commercial dominance. Read what Larry had to say about the new Silk Road. China is right now becoming the economic engine of the world as the West craters. On top of this, understand that China is a COMAND economy. These debt figures include that of the corporations which all share the same money pot as the PBOC. Yes it’s fine to have a difference of opinion, but ignoring facts does not make anyone a good advisor, doesn’t make us money, which is the goal right?
Keep in mind, even with a crisis, that banks with a capital B will still want to continue to do business. What this means practically speaking is that whether they close for a 3 day holiday or even 2 weeks, they will be pressuring governments to allow them to reopen.
You can’t make money if you’re closed. Same for food stores, ect.
I would also like to point out that even during the Great Depression, if took 3 years before it hit its bottom. So, while a stock market crash may happen, and many will lose fortunes, I believe normality will continue. It probably will be a long slow painful slide of spiraling job losses, plant closings, and bankruptcy sales.
On the up side, if you have little to no debt, and sufficient savings, you will probably be able to get good bargains as prices come down.
All central banks are investing into the stock markets. An example, the National Bank of Switzerland is the world’s largest shareholder of Facebook. The melt down will be of catastrophic proportions, because the central banks will need a bail out themselves. Not just gold, but silver, platinum, palladium will go up in a vertical ascent. Agricultural commodities, in all probability, as well.