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Friday, November 08, 2013 8:17 PM

Credit Boom in China Could Trigger Bigger Crisis Than 2008; Three Things China Wants, Eight Things China Needs

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In case you think all is well with China and the Yuan will soon replace the dollar as the world's reserve currency, you may wish to reconsider.

Credit growth in China is expanding at a massive rate on nonviable projects, and that is the only reason China has been able to meet its growth targets.

Marc Faber believes China could spark a bigger crisis than in 2008.

An alarming credit boom in China could trigger a global financial crisis that would make the one in 2008 look mild by comparison, says old gloomy eyes, Marc Faber.

“If I am telling you that we had a credit crisis in 2008 because we had too much credit in the economy, then there is that much more credit as a percentage of the economy now,” the author of The Gloom, Boom & Doom Report told CNBC late Thursday. “So we are in a worse position than we were back then.”

China, in particular, has seen credit as a percentage of the economy jump 50% in the last four and a half years, said Faber, the “fastest credit growth you can image in the whole of Asia.”

Meanwhile, Deutsche Bank strategist John-Paul Smith told clients on Wednesday that China’s growth model continues to be based on “ever-expanding debt, which leaves the country and financial markets very vulnerable to any potential loss of from investors and lenders.”

It Can't Be Done

I have been preaching a similar message as Faber for years, most recently on November 6, in It Can't Be Done.

Three Things China Wants

  1. 7.2% growth
  2. No rise in unemployment
  3. Strengthening of the ruling party.

Eight Things China Needs To Do

  1. Cleanup its banking sector
  2. Curtail rampant credit growth
  3. Privatize State-Owned-Enterprises (SOEs)
  4. Rein in monetary growth
  5. Eliminate dependence on nonviable infrastructure projects as a means of growth
  6. Writeoff bad debts
  7. Float the renmimbi (yuan)
  8. Undertake massive economic and political reforms

What China wants is impossible. And the longer China waits to do what needs to be done, the bigger the eventual crisis.

Mike "Mish" Shedlock

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