Rising Bad Loans Indicate Impending Crisis for China

By Sasha Cekerevac for Investment Contrarians | Aug 17, 2012

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With the global economy teetering on the brink of decline, many investors are looking to a resurgence of China’s growth rate. While that nation has recently slowed sharply, many economists point to China’s growth, which still exceeds that of most countries in the global economy. I would warn investors that there are many signs that China’s growth will not be as robust as it has been over the past few years. There are increasingly troublesome signs that the Chinese are being dragged down by the slowdown in the global economy, and I think it is more likely that they will lose further steam rather than resurrect China’s growth rates of the past.

One common element to the financial crisis in the global economy is when bad debts stack up on the books of lenders. This was and continues to be a problem for Japan, after the crash of the late 1980s, and we see bad debts piled up in Europe and even the U.S.

New reports are surfacing that may endanger China’s growth rate and impact the global economy, as bad loans held at Chinese banks have risen for the third consecutive quarter, according to the China Banking Regulatory Commission. This is the longest stretch of bad loan increases in eight years.

Banks in that nation are having trouble dealing with problems that are common in the current global economy: weak loan demand and higher defaults. This follows on the heels of a drop of 41% for local currency loans in July from the previous month.

With the global economy as weak as it is, there are no economic signs of a rebound in China’s growth rate. This is yet another variable for economists, as well as business leaders, to agonize over. With so many nations underperforming from their optimum levels, there needs to be a catalyst to kick-start the engine of the global economy. Many have been banking on China’s growth to tip the global economy back into a growth phase. I’m more worried that a lack of China’s growth may potentially tip the global economy into an even deeper recession.

Tags: China’s growth, Europe, financial crisis, Global economy