By Craig Tindale, DebtWatch
There is a crisis of confidence unfolding in China that is likely to end in a full scale capital flight and a disorderly collapse in both economic and political cohesiveness. The lowering of the reserve requirements for Chinese banks, while reported in the media as a loosening of credit, is more likely an early sign of capital flight. Similarly reflective of this, are the large increases of gold purchases by Chinese citizens who have few diversification options away from the RMB.
China’s wealth is concentrated abnormally within an elite 1% of high net worth individuals. This 1% command up to $5 USD trillion dollars in wealth. If these elite should rush the doors to move their wealth out of the country using the multitude of avenues that exist to evade Chinese capital controls, then the Chinese banks may face the biggest bank run in history.
The problem is that while the propaganda machine might control the minds of the masses, the wealthy elite are virtually immune to thought control and are likely to be the best informed and have the means to be the first to leave. Reserves are mostly tied up in USD and treasuries cannot be liquidated for fear of raising the value of the RMB. Along with further eroding trade surpluses, this means a capital flight by the elite occurring with massive insolvency in the credit market could vaporize the Chinese liquidity in what will seem like an economic Cat 5 hurricane.
The Chinese economy is in the final stages of largest Ponzi scheme ever devised. Minsky outlined three distinct phases in the credit cycle: In the first phase known as the hedge phase; economic actors borrow money to invest in order to create goods to sell for profit. In the second stage, the speculative phase, more economic actors join the economy, borrowing money to invest in assets in the expectation that these assets will rise in value. In the last stage, known as the Ponzi stage, economic actors borrow in the hope that conditions will improve. This borrowing is designed to avoid insolvency during what is perceived or hoped to be a short to medium term setback in economic conditions.
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