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China’s $26 Trillion Problem and Why It’s a ‘Systemic Risk’

China's debt concerns are amplified by a steady climb in non-performing loans on Chinese bank balance sheets.

The instability of China’s credit-fueled, investment-focused growth strategy is—without a doubt—one of the greatest systemic risks facing the global economy according to Hedgeye Financials analyst Jonathan Casteleyn.

“If there’s one factor to look at every week that looks a little weary, a little ominous, it’s Chinese credit growth,” says Casteleyn. This disconcerting trend is amplified by a steady climb in non-performing loans on Chinese bank balance sheets.

Here’s a look:

  • Chinese credit outstanding amounts to CNY 173.5 trillion ($26.2 trillion) as of September 30, 2017 (data released 10/15/2017), which is up CNY +19.1 trillion or +12.4% year over year.
  • Chinese non-performing loans amount to CNY 1,636 billion ($246 billion) as of June 30, 2017, which is up +13.8% year over year.

“The Chinese system has been propped up by debt-fueled growth,” Casteleyn explains in the video above from The Macro Show. “Eventually this very substantial contributor to GDP could start a banking crisis at some point.”

It’s difficult to pinpoint when this collapse might happen because the Chinese government’s economic data masks the underlying reality.

“It’s hard to understand when you have a state controlled media when the Chinese numbers obfuscate any sort of cyclicality or credit problems,” Castelyn says. “They tell you they grow six or seven percent on a GDP basis every quarter.”

Watch the video above for more.

By Robert Milburn of Hedgeye Risk Management

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