Bank Bailout Goes Mainstream

Bloomberg: China Bank Bailout Calls Grow Louder as Markets Seen Vulnerable
Predictions of a Chinese banking system bailout are going mainstream.

What was once the fringe view of permabears and short sellers is now increasingly being adopted by economists at some of the world’s biggest banks and brokerages. Nine of 15 respondents in a Bloomberg survey at the end of last month, including Standard Chartered Plc and Commonwealth Bank of Australia, predicted a government-funded recapitalization will take place within two years. Among those who provided estimates of the cost, a majority said it will exceed $500 billion.
What about the currency implications?
“A recapitalization will happen after the Chinese government comes clean with the true nonperforming loan figure,” said Kevin Lai, the Hong Kong-based chief economist for Asia ex-Japan at Daiwa Capital Markets. “That will require a lot of money creation.”


  1. I think the inflation occurred at the time the loans were made. Bailouts just offset the deflation that would otherwise occur and so maintain the already inflated price level. Am I thinking about this wrong?

    1. You are correct, but my hunch is China won't stop at offsetting the deflation. Unlike the U.S., Japan and Europe, China won't sit around waiting for borrowers to take out loans to restart the next credit cycle. They'll do as they did in the past year: force lending through govt channels.