The Chinese economy is turning into a “financial pyramid”, GNS analysts are categorical: interest on loans eats up about 20% of Chinese GDP, and servicing the accumulated debt occurs due to a further increase in debt, closing the situation into a vicious circle. When the Chinese credit bubble collapses, the entire world economy will be in danger, warns GNS.
One of main China’s troubles, according to many economists, is the ratio of government debt compared to the GDP growth. The latest data showed an incredible increase in the rate, which reached 250%. Several corporate defaults were announced last year, causing a sort of panic among foreign investors. The overall volume of overdue payments jumped to 12 million yuan, creating turmoil in the financial sector.
Since now, one of the most significant private investment funds - China Minsheng Investment Group - reached the dangerous zone, threatening with a bankruptcy. The company failed to payout 3 billion yuan in February, while the overall volume of the portfolio reached 310 billion yuan or 45.5 million dollars. The fund must pay out 800 million dollars now to Eurobonds holders. The company does not have enough funds for the payout though, and its officials announced that they had hired lawyers company, Kirkland & Ellis, while banks had gathered creditors committee to resolve the issue. However, CMIG's bonds are trading with a price of 40% from the nominal currently as investors’ trust plunged recently. That might become a real danger for the Chinese financial sector; some of the analysts compare CMIG with JPMorgan Chase in the United States.