China's collapse will be most welcome.

We know that, thanks to the Congress, the Indian economy is teetering on the edge of a precipice while the Chinese economy is galloping along at 7.5%, even after tightening of credit by the government. However, for a few months now there has been a steady drip of concern over China and some hints that things may not be as rosy as the government makes it out to be. George Soros, the billionaire investor, thinks that the greatest danger to the global economy in 2014 could come from China. Twice in 6 months last year the interbank lending rate rocketed to over 10% when the Peoples' Bank of China indicated that it would not increase lending to banks. It was not going to stop, or even reduce, lending but would not increase it. That was enough to cause the banking system to seize up. In panic the PBOC injected $55 billion into the system. Money is not a problem for the PBOC. It has been buying dollars to keep the renminbi weak so as to help exports and has a stockpile of over $3 trillion. Trouble is that in buying dollars it is injecting renminbi into banks which have been lending to local governments, companies and to individuals to buy properties. Total debt in China increased from 125% of GDP in 2008 to 215% of GDP in 2012, from $9 trillion to $24 trillion, a jump of $15 trillion in 5 years which is equal to the entire commercial banking sector in the US. Total credit jumped 20% last year. Banks are sitting on huge bad loans which they roll over by borrowing even more. Economists are worried about the speed of the credit growth rather than the total credit itself. 

Such a fast rate of growth has apparently occurred 33 times previously and each time it ended with a severe slowdown in growth. If the growth rate falls precipitously, with increasing unemployment and hardship, civil war could break out with division of the country. An outcome fervently to be hoped for as it will cripple our most dangerous enemy. For the first time a Chinese company, Chaori Solar has defaulted on its bond payment. If more companies default it would increase the stress on banks enormously. Matters will not be helped by a 18% drop in Chinese exports. With inflation at 2% the government can stimulate the economy by injecting more cash. But for what? At what point will the edifice collapse? We wait in anticipation.