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“First Sign of Erosion in the Chinese Debt Pyramid”

A 2015 Harvard Business Review article provided a reminder of China’s explosive economic story:

China has accomplished a remarkable feat in transforming itself from one of the world’s poorest countries to its second largest economy in just 30 years.

China’s pace of growth has been so rapid that even the expansion of 6.7% in 2016 garnered this Jan. 19, 2017 CNN headline:

China posts weakest annual economic growth in 26 years.

At the same time, EWI’s April Financial Forecast noted:

China’s banking system surpassed the Eurozone to become the world’s largest in debt assets. At $33 trillion, Chinese bank loans exceeded Europe’s $31 trillion at the end of 2016. Of course, that’s just the headline figure. The post-2010 explosion in shadow bank lending suggests that the total is far higher.

Furthermore, the May Financial Forecast says:

Recent issues of the Elliott Wave Financial Forecast discussed China’s potentially pivotal role in the global economy’s passage from sporadic growth into deflation and depression. The economy that the IMF sees as “resilient,” the Elliott Wave Financial Forecast instead describes as burdened by a giant debt balloon that continues to expand only through the application of more and more dubious credit instruments. Last month we discussed a “category of shadow lending products called ‘entrusted loans.'” At that time, we noted that entrusted loans, which allow Chinese firms to get around a ban on lending directly to one another, grew to $1.7 trillion, or 9% of total Chinese credit, as of January. In April, the first sign of erosion in the Chinese debt pyramid appeared as Chinese banks announced that they are bailing out of entrusted loans.

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