Signs of China’s Credit Bubble?


There has been a lot of talk recently about the prospect of a Chinese credit bubble. Simply put, China more often than not has never adhered to normal economic principals. For decades it has always been an anomaly.

Gold, traditionally seen by all investors as a safe haven of financial protection is a major indicator of an economies performance. Gold traded on the Shanghai Gold Exchange was at a three month high fuelling speculation that investors are seeking alternative investments.

Copper, of which China consumes 45% of global production, is used by Chinese investors as capital to secure credit for larger projects. One would assume if there was a credit issue, then there would be a selling of copper to help pay off the debts. However, in January 2014, China bought a record 397,459 tonnes of refined copper, shy of its record purchase in December 2011 of 406,937, again showing signs that it plans to carry on borrowing.

Iron ore is also another concern. Again used as collateral for a loan, “Borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further” says Yang Chanfhua from the Beijing Antaike Information Development Co.

Bond defaults are a major concern. The first potential sign of bubble was at the start of February when a $50m coal-mining bond failed to repay investors on maturity. The remainder of 2014 is expected to see a further $875bn of similar projects to mature. If further defaults occur, this will likely cause a lot of panic on the markets as well as leaving Beijing to answer many questions.

As the signs are there showing a bubble, we have to take China’s anomaly to economic fundamentals to counter these claims. After all, at least some 500 tonnes of gold has gone missing under Chinese import data and gold mine supply, however the graph above shows this could be closer to 1600 tonnes missing.

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