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China Credit Syndrome : Republished

June 30, 2011

Credit Entropy and the China Credit Syndrome

We republish this to reiterate the thesis that China ia a cauldron of bad loans ready to implode.

China’s bank non performing assets are likely to implode soon on account of a) trade links creating receivables (so called foreign exchange reserves)  which are not likely to be serviced b) conversion of savings into current income (or GDP) through investments in low return projects.

Remember, GDP is defined as C+ I +G + (net exports).  InChina’s case, two components of growth are being created artificially.  A) Net Exports, which keep generating receivables that are not likely to be paid.  In the case of a company which generates sales through receivables that are not likely to be paid off is said to perpetrate a fraud (remember Waste Water Management) Why not in the case of a country?  B) If savings are deployed in low return investments, it is no different from a company weakening its balance sheet to improve current income statement.

 

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From → Credit Analysis

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