Loading ...This is where it gets interesting. Rapid Credit growth throughout 2007 underpinned stock prices, general consumer confidence and overall economic activity. Nominal GDP expanded at a 5% rate during 2007’s first half, 4.3% in Q3 and 4.1% during Q4.
Meanwhile, bond yields completely detached from equities and traditional fundamental factors. Why were yields collapsing in the face of booming Credit growth and inflating risk markets? Because the preservation of “Terminal Phase” excess was fomenting a late-cycle parabolic rise in systemic risk: inflating quantities of increasingly risky Credit instruments, dysfunctional risk intermediation, destabilizing market speculation, and extreme late-cycle imbalances/maladjustment. Stated somewhat differently: efforts to sustain the boom were exacerbating structural impairment. The bond market discerned an increasingly untenable situation.
History Rhymes. China’s Aggregate Financing (approx. non-government system Credit growth) jumped $1.60 TN during 2019’s first five months, 31% ahead of comparable 2018 Credit growth. So far this year, Aggregate Financing is expanding at better than 12% annualized. This is a rate of growth sufficient to sustain the economic Bubble (Beijing’s 6.5% growth target), apartment prices, corporate profits, stock prices and general market and economic confidence.
But extending the “Terminal Phase” has ensured a historic parabolic surge in systemic risk. Consumer (chiefly mortgage) borrowings have increased 17.2% over the past year (40% in two years!). Thousands of uneconomic businesses continue to pile on debt. Unprecedented over- and mal-investment runs unabated. Millions more apartments are constructed. The bloated Chinese banking system continues to inflate with loans of rapidly deteriorating quality.
Global risk markets have been conditioned for faith both in Beijing’s endless capacity to sustain the boom and global central bankers’ determination to maintain system liquidity and economic expansion. So long as Chinese Credit keeps flowing at double-digit rates, inflating perceived wealth ensures Chinese spending and finance continue to