While the rest of the world is transfixed by the latest pocket change bailout of the Eurozone, China has stealthily conducted an economic rescue bigger than than one and a half TARPs.
Dylan Grice’s latest note focuses on the key news out of China from last week which oddly received very little media attention, namely the onboarding by the Local Government Financing Vehicles (LGFV) of $463 billion in bad loans made to various infrastructure and development projects as part of the Chinese stimulus package.
This is nothing short of a bailout the likes of TARP when Paulson transferred billions of toxic debt to the government’s balance sheet.
The reason why this is actually a much bigger deal than perceived is that as Grice notes, a “bail-out of $463bn is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!! If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008.”
In other words, China very quietly and stealthily buried a massive bailout with just one passing Reuters mention. And nobody cares.
This is all China has done with its bail-out of local governments. It has upped the ante. While we can’t predict where complex systems will go, we know that the longer their volatility is artificially suppressed, the more emphatic will be its release when it does come. It is more likely that China has one and a half times (and counting) the 2008 financial crisis ahead of it.