Will China shake the world again?

Here is the thing: when a big economy is investing at that pace to generate wealth and jobs, it is a racing certainty that much of it will never generate an economic return, that the investment is way beyond what rational decision-making would have produced.

That is why in China, there are vast residential developments and even a whole city where the lights are never on and why there are gleaming motorways barely tickled by traffic. 

But what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China's debts as a share of GDP have been rising at a very rapid rate of around 15% of GDP, or national output, annually and have increased since 2008 from around 125% of GDP to 200%.

DYI Comments:  Expect a depression for Australia when China goes bust as they will no longer be sending major amounts of commodities to China.  This will also put a crimp into Canada as well which will burst their residential real estate bubble dropping prices 40% to 60% along with a major recession.  The U.S. as well will be affected with a recession as world trade will dry up for at least the next 5 to 7 years.  Deflation will reign supreme along with very low interest rates pushing down the yield of the 30yr and 10yr bond yields under 2% and 1% respectfully.

There are no exceptions to the lessons of financial history: lending at that rate leads to debtors unable to meet their obligations, and to large losses for creditors; the question is not whether this will happen but when, and on what scale. 

Which is why we've seen a couple of episodes of stress and tension in China's banking markets over the past nine months, as a possible augury of worse to come.

DYI Comments:  When looking for a pin to burst America's stock and junk bond market China is moving up to the head of the class.  DYI will be looking at this closely.

DYI