China facing a new threat of credit crunch!

Almost all the economists alarmed an increase in risk every day to see a new burst in credit bubble in Asia and now things seems to be clear now. The rating agency Fitch indicates that such event without precedent in the history of the modern world could burst in China. The Tribune does not beat around the bush; and citing a threat of a credit crunch. We have discussed these things already on various times. The occurrence of this new credit crisis may in turn be hit hardly soon. The main resources for these happening are the excessive growth of bank loans to the private sector and the loans outside the formal sectors etc which lend in turn more difficult to repay by the borrower. On Friday, the Chinese interbank rates showed a sharp decline, the refinancing rate to seven days - part of the cost of interbank lending - dropping from 11.62% to 8.33%, such a move could not be obtained thanks to rumors suggesting that the PBOC (the Central Bank of China) was pressure to release the donor funds, or it can intervene directly. Earlier, panic had seized the Chinese interbank market, the benchmark rate to a record high at 13.91%. In the end, according to Bloomberg, 50 billion Yuan (about 6.15 billion Euros) were injected into the market by the central bank. The situation with less tense will prevail in recent weeks and it will continue, and the worst is still to be feared to come out. Leading analysts consider that the PBOC should maintain its policy to severely restricting access to credit for businesses and individuals. Reasons behind this are; it will help to restrict the high level of bad loans held by Chinese banks. A context is that investors fear that banks are facing difficulties increasingly strong to refinance. During the past two weeks, the rate of refinancing had indeed soared, the Chinese Central Bank stopping the injection of liquidity, despite the economic downturn. A measure which provoked a strong restriction of access to credit, draping the exchanges while blocking the lending capacity of banks. Monetary authorities and Chinese policies now want to end the very rapid credit growth in recent years. It is true that there is an emergency, leading institutions in the viewfinder smaller banks, which have increased their loans while speculating heavily. A situation that pushes the government to "clean up" the banking market, closing the valve to riskier institutions, a policy may lead some to bankruptcy. Another worrying and not least: in May, a report released by the rating agency Moody indicated that informal lending outside the banking sector in China had increased by almost 70% over the past two years ... representative now the equivalent of 55% of gross domestic product (GDP). Financial products of the informal sector amounted at the end 2012 to 29,000 Yuan (3,600 billion Euros), according to preliminary calculations by Moody's. A narrower definition of the sector excluding loans fiduciary obligations and asset-backed companies, the informal sector would weigh only 21000 billion Yuan, but still 39% of GDP. The Moody's report indicated that parallel "informal banking sector could have a leverage effect on the finances of the wider economy and amplify fears of a credit bubble. The rating agency felt that the rapid growth of informal loans increased risks to the banking system and the Chinese economy as a whole. "Given the sheer size and growth of informal banking in China, we doubt the ability of banks to guard against a significant increase in defaults" in this area, yet warned by Moody's. In March, the Banking Regulatory Commission noted that it had ordered banks to control the funds asset management more closely in order to contain the risk and increase transparency. According to Fitch, Chinese banks have somehow hidden in a second parallel balance the equivalent of 2 billion loan mechanism to circumvent the official boundaries and new regulations put in place to curb the excesses. Practices that cause the bursting of a credit bubble. Because, according to Fitch, half of the loans must be renewed every three months and hence forth at least in less than six months. According to Charlene Chu, senior director of Fitch in Beijing, "The country has duplicated the entire U.S. commercial banking system in five years." Adding that the credit is increased from 9 000 to 23 000 billion dollars since the collapse of Lehman Brothers. "All this is far worse than anything we could know before in a major economy. We do not know what will happen. The next six months will be crucial, "said Chu also. For her, "the model of growth based on credit is clearly exploding. This could fuel a massive crisis of over-capacity, and potentially a Japanese-style deflation. " According to Wei Yao of Society General, the debt level of Chinese enterprises has reached the threshold of 30% of GDP, the threshold is nothing but a typical of financial crises.

The Gold Prices Falling Because of the Fed

The Federal Reserve has brought down the price of gold this week as investors reacted to the announcement of the U.S. central bank, suggesting that it would progressively restrict its extraordinary support measures to U.S. economy. The ounce of gold and has tumbled nearly $ 100 in the space of a week, from Thursday even below the threshold of 1300 dollars. This is something that had not seen for nearly three years. Friday, the price reaches $ 1295.45, which is its lowest level since mid-September 2010. Perverse effect of supportive policies, the Fed now considers the views of official figures, the economic recovery appears to begin in the United States no longer justifies the pace with which it buys Treasury bonds and mortgage-backed securities. These are the operations that are currently around 85 billion Euros per month. However, the withdrawal of these liquidity injections, which dilutes the value of the dollar, greatly reduces investor concerns about a possible resurgence of inflation. Thereby making the purchase of precious metals such as gold is much less attractive. The barbarous relic while losing its safe haven qualities, strengths as a bulwark against the rising prices are having so little appeal.

Some analysts believe that gold is now in a vicious circle, the decline in encouraging investors to liquidate ETF (investment funds backed by physical gold stocks). Thus, the most important of these funds, has seen its shares fall below 1,000 tons of gold this week. However, these new gold ETF disbursements weigh themselves on courses, racing somehow the machine. Meanwhile, physical demand is affected by the measures taken by the Indian government. The authorities have indeed raised the customs duties on the yellow metal, while the rupee is at a record low against the dollar. Now, gold imports will be allowed only for purposes of jewelry making. In addition, importers must now pay for their purchases in cash, without payment facility. India believes that these imports represent a significant portion of its current account deficit. A policy should reduce gold imports during the month of June, while India is the world's largest consumer of the precious metal. Finally, on the London Bullion Market, an ounce of gold finished at $ 1,295.25 at auction Friday night, against 1391.25 dollars at the end of last week.

The Corporate Bankruptcies and The Crisis

The real crisis, the corporate bankruptcies are the real crisis and it is the creative destruction. Like it or not, the real victims of the crisis in Europe are definitely businesses. The loss of business in the Euro zone increase indeed 21% in 2013, to return to a growth rate moderate 7% in 2014. These bankruptcies are concerned and unfortunately synonymous with soaring unemployment and a real deindustrialization. Since the record figures of 2009, the waves of loss, of the United States to China, passing throughout the Europe, concentrated in areas with erratic tax incentives, such as construction and services. Once the boost is flown, numbers of companies were no longer profitable. Today, the shock wave is more fundamental: the sharp slowdown in consumer spending in Europe, or at half the exports for Asia. In Europe, the areas of distribution, furniture, consumer electronics, and automotive, and are strongly affected. This industrial Darwinism seems to be the swell of the year 2013, still marked by the credit crunch. But the induced effects are numerous: for example in Asia, companies see their market melt like snow in the sun and the overcapacity problem. This economic turbulence with a number of businesses created which also increases in many countries could it is a synonym for renewal? Economic entropy can be conducive to a new beginning, if we are to believe the evolutionary hypothesis of Schumpeter. The undertakings least well adapted and especially the least innovative way to let those who are reinventing themselves and meet new needs. "The perennial gale" Schumpeter, after the storm of 2009 and the economic winter it starts to make a lot. And yet ... The needs are there, in sectors with high added value, intensive skills, human capital and social capital, driven by research and innovation and entrepreneurship. So, of course the news is bad with soaring business failures and accelerated payment risk, while margins are already weakened. But, is it better to jump back? The answer is “Maybe”. It is also necessary that the guidelines are taken on supporting innovation, the business environment, or incentives to take care of seedlings, otherwise incubators will also be decimated.

After Gold Bubble Burst!

The soaring price of gold in recent years in early 2009 it was $800 and it reached more than 1900 dollars an ounce in fall 2011 - had all the characteristics of a bubble. And now, like any soaring prices of disconnected assets fundamentals of supply and demand, this gold bubble deflates. At the height of the outbreak, mad gold - a paranoid mixture of investors and others whose political agenda is determined by fear - happily predicted the price of gold on the order of 2000, 3000 or even 5000 dollars an ounce within the next few years. But the price has been declining since. In April, gold was at about $ 1,300 an ounce - and its price continues to trade under 1400 dollars, a drop of nearly 30% from its 2011 high. Many reasons can explain the bubble burst, and why the price of gold will probably fall further to stabilize at around $ 1,000 an ounce in 2015. First, the price of gold tends to buckle when serious economic, financial risks, and geopolitical threat to the global economy. During the global financial crisis, even the safety of bank deposits and government bonds was doubted by some investors. If there is concern of a financial Armageddon, it really is time metaphorically in his bunker to store weapons, ammunition, canned and gold bullion. But even in this terrible scenario, gold would be a poor investment. Indeed, at the height of the global financial crisis of 2008 and 2009, gold prices have collapsed several times. In an acute credit crunch, leverage purchases of forced sales or leads, because any price correction triggers margin calls. Gold can be very volatile - up or down - at the height of a crisis. Secondly, gold performs better when there is a risk of high inflation, insofar as its popularity as a store of value increases. But despite an aggressive monetary policy by many central banks - successive rounds of quantitative easing have doubled and even tripled the money supply in most advanced economies - the overall inflation is still low and steady decline.

 The reason is simple: when the monetary base explodes, the velocity of money slows as a result of the accumulation of liquidity by banks as excess reserves. The reduction of public and private debt keeps growing global demand below that of the offer. Companies therefore have little flexibility in their pricing because of too much capacity, and the bargaining power of workers is reduced due to high unemployment. In addition, with power increasingly weakened union, globalization has led to a cheap production of goods with high labor in China and other emerging markets, undermining the wages and employment prospects of workers unskilled workers in advanced economies. With low wage inflation, it is unlikely that there has been a steep rise in property. However, inflation fell even more today because of the overall downward adjustment of commodity prices in response to weak global growth. And gold follows the actual and expected decline in inflation. Third, unlike other assets, gold yields no income. While publicly traded stocks pay dividends, bonds have their coupons, and houses, rents, or are just a game of capital appreciation. Now that the global economy recovers, other assets - listed real estate or even the resurgent shares - now give better yields. Indeed, U.S. and global equities listed are far better than gold since the sharp increase of its course in early 2009. Fourth, the price of gold rose sharply when the real interest rate (adjusted for inflation) became negative after the various rounds of quantitative easing. The time to buy gold is when actual returns on cash and bonds are negative and declining. But the best prospects in the U.S. and global economies imply a term exit quantitative easing and zero interest rates from the Federal Reserve and other central banks, which means that real interest rates will rise rather than drops. Fifth, some have argued that the heavily indebted sovereigns would encourage investors to turn to gold because of the risks borne by the bonds. But there is an opposite situation. A large number of heavily indebted governments have substantial gold reserves which they may decide to get rid of to reduce their debts. In fact, the information that Cyprus planned to sell a small fraction - about 400 million Euros ($ 520 million) - its gold reserves led to a fall in the price of gold by 13% in April. Countries like Italy; which have massive gold reserves (over $ 130 billion), might also be tempted to do so, which would lead to a further decline in the price.

Sixth, some ultra-conservatives, especially in the United States, have so encouraged the gold rush that the effect was counterproductive. For this right-wing fringe, gold is the best hedge against the risk posed by the government conspiracy to expropriate private wealth. These fanatics also believe that a return to the system of the gold standard is inevitable, since the hyperinflation drift "devaluation" of paper money by the central banks. But in the absence of any conspiracy, and given the decline in inflation and the inability to use gold as a currency, such arguments are not valid. A currency serves three functions: it is a means of payment, unit of account and a store of value. Gold can be a store of value, but it is not a payment, you cannot use it to pay his races. It is not a unit of account the prices of goods and services, and those financial assets are denominated in gold. Gold remains so this "barbarous relic" by John Maynard Keynes, with no intrinsic value and mainly used as a safe haven against fear and panic largely irrational. Yes, all investors should have a very small share of gold in their portfolios as a hedge against extreme risks. But other real assets can be comparable coverage and extreme risk - although still present - are definitely lower than they were at the height of the global financial crisis. Even though the price of gold is likely to rise in the coming years, it will remain very volatile and will decline over time, over the improvement of the global economy. The gold rush is over.

More About Financial Bubbles

But why economic agents do not learn a lesson from history and what is the origin of the observed market euphoria? It should actually wonder more generally about the rationality of agents. By their individual actions, they participate in effect to create a gap between the actual value of a thing and its market value. And this gap increases; more the bursting of the bubble is near, even if the term is unknown. This process can be summarized by the metaphor of the beauty contest Keynes in Chapter 12 of the General Theory. So imagine that you are in a competition against a host of other competitors. You are facing a hundred photos of girls all equally charming as the other, and you are asked to select six, the six prettiest. The person whose choice is closest to the average choice (that is to say the girls who got the most votes) will be the winner of this competition and win the jackpot. Three techniques are available to you and to win. First, you choose a simple, even naive strategy, which is to choose the six most beautiful girls according to your standards of beauty. But you can also adopt a strategy. which is more vicious this time to copy your selection on the other competitors with your expectations. Finally, you say that there is no reason for you to be the one to embrace the second strategy you determine an ultimate, which includes the fact that each competitor will not only formulate expectations about choice other participants, but also on your own. The metaphor of beauty contests and shows that speculation is mainly due to expectations that each agent makes about the behavior of other agents. Worse, it seems rational to participate in this type of competition because there is a real jackpot game now apply this reasoning to any other market (financial, real estate or even tulips) and you now understand that when Prices are disconnected from reality is that economic agents engaged in a competition of beauty contests guy and that large batches are obviously involved other words, do not enter a speculative market generates a cost (opportunity) that corresponds to the potential gain that you would not have achieved; corollary, it is rational to participate in inflating a bubble in order to enrich themselves, knowing that sooner or later the bubble will explode . If the game mirrors expectations promote the creation of speculative bubbles, it should be noted that favorable market conditions may also participate in this movement. Thus, over the last ten years, it is interesting to note that each period of financial euphoria is a situation of low interest rates and abundant liquidity. Thus to extinguish the fire of the Internet bubble of the early naughtier, the Federal Reserve has made successive rate cuts that have led to a rise in private debt and the emergence of a real estate bubble The subprime; Belated. Again, the response of central bankers involved in the reduction rates that, this time, encouraged the public debt; replete. And since it seems that we are now cured syndrome "this time is different" (Reinhart and Rogoff), the current historically low interest rates could facilitate the emergence of a new bubble. What will be the nature of the next big crisis? An early response, rather obvious, is of the bond market, when many experts welcome historically low borrowing rates, especially for states but also for corporate, bond bubble continues to swell to form a time bomb. And if some commentators are trying to alert the markets inevitable future rise in interest rates, the warnings remain almost unnoticed as the general euphoria is great. But other risk factors may also be highlighted. Real overheating in China, seven-fold during the decade gold bubble carbon and financing of energy transition and finally growing attraction for bit coin. Yes, this totally paperless currency created in 2009 by a computer meeting the pseudonym Satoshi Nakamoto, who was at the center of media talks some time ago, due to the sudden surge in its course and all its fall brutal. At its inception, the parity bit coin stood indeed one thousandth of a dollar before reaching on April 10 to a high of 266 dollars, then lose in just a few days over 70% of its value to pass under the below 80 dollars. All bubbles eventually burst and one day or the other. But the man never lacks imagination to always find a new source of enrichment. And when he is not at the origin, it adopts a mimetic behavior that allows him to achieve his goal. This process can really be repeated ad infinitum? Or, maybe it does not itself amount to a giant bubble that would only swell for centuries?