YOUR MIND ON MONEY: Chinese credit bubble likely won't end well

2014-02-06T12:37:00Z 2014-02-06T20:18:21Z YOUR MIND ON MONEY: Chinese credit bubble likely won't end wellF. Marc Ruiz Times Business Columnist
February 06, 2014 12:37 pm  • 

If you’ve followed my column then you know I’ve never been a believer in the “Chinese miracle” economy.

I have to admit, I am philosophically opposed to the Chinese system of central planning, and so my opinions are clearly biased. Once in a while, however, bias can be a good thing.

What can’t be disputed about China are the 1 billion people who share a culture of hard work and an intense desire for a better life. Unfortunately, these people are dominated by a system of central planning rooted strongly in what inevitably becomes the fundamental consequence of all centralized big government: human oppression and economic corruption.

The corruption in China is deeply embedded and present at all levels of society. Economic activity is intertwined and often engineered by government and this has led resources to be poorly allocated according to the agendas of bureaucrats as opposed to investors and entrepreneurs. For a flagrant example of this go to YouTube and type in “Chinese ghost cities.” Seeing dozens of brand new cities completely empty of residents is downright eerie.

Beyond empty cities, environmental destruction and deplorable labor practices, Chinese corrupt central planning has also enabled a financial system well known for being built on poor controls and lack of transparency.

While there certainly is incredible wealth being created in China as Chinese society transforms from being a mainly poor and rural society to an urbanized and industrialized one, the financial mismanagement of this transformation is creating financial risks with potential global implications.

Recent analysis from rating agency Fitch indicates over the last five years the Chinese credit system has grown from $9 trillion in 2008 to over $23 trillion in 2013. This type of growth is staggering, and when combined with the reality of corrupt resource allocation and horrendous financial system transparency, the prospect of a Lehman type financial event appears quite plausible if not inevitable.

Stress fractures are beginning to occur in China, and just last week the Industrial and Commercial Bank of China engineered an opaque bailout of a popular Chinese investment product called a credit trust. The $3 billion bailout was handled in typical Chinese fashion with few details. What is clear, however, is even in a centrally planned financial system bailouts are still finite.

While I believe the type of financial and social controls being attempted in China will ultimately prove to be unsustainable, one benefit of this model is the ability to efficiently effect shorter term policy changes.

Let’s hope the attention garnered by the recent trust bailout provides Chinese central planners with the inspiration to get their house in order. Even, however, if China manages to kick their credit bubble crisis a bit down the road, I can’t imagine at this point how all of this ends well.

Opinions are solely the writer's. F. Marc Ruiz is a local investment strategist and co-host of "Your Mind on Money" at noon Mondays on WLPR-FM 89.1 The Lakeshore. Reach him at

Copyright 2014 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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