The dominoes begin to fall in China

Chinese Domino

Forget tapering. Forget Ukraine. The largest single risk to the world economy and financial markets right now is China.

What’s going on in China reminds me a lot of what I witnessed firsthand when I lived in South Korea in the 1990s, before that economy’s crash in 1998.

Just as China now, South Korea was an immature, state-controlled financial system funneling cheap money to well-connected and politically favored large enterprises.

Fuelled by a steady diet of cheap money, these companies kept adding capacity with no regard to profitability or return on capital. They simply focused on producing more stuff and expanding their size. They employed more people, and everyone was happy.

But, all the while, they were borrowing more and more money, until eventually they collapsed under the debt load when liquidity dried up.

Before Korea, the exact same thing happened in Japan, and a giant, unsustainable debt binge brought the “miracle economy” to its knees.

But the Korean and Japanese debt bubbles are nothing compared to what we see in China today.

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