Over the weekend I was reading about how the Chinese banks are playing games with their loans and moving them off-balance sheet. How much of this is going on and why? Here is the possible problem with this. If the world economy stagnates or even declines again, what will happen if Chinese workers, borrowers, and real estate companies have problems servicing their debts?
Here is one possible scenario I hope never plays out. The world economy stagnates or declines more than expected, Chinese factories begin to experience a slowdown in production, Chinese workers begin to be laid off, leading to more non-performing loans. If this occurs, one wonders how many loans are at risk. Can you imagine if the Chinese government has to step in and bailout its banks like we did ours? This would mean that one of the biggest buyers of U.S. debt would probably reduce their purchases, or even worse, stop buying our debt.
This would lead to severe complications in the U.S. We have not structurally reformed our government and economy. We cannot stop gourging ourselves with debt. Our states are in a fiscal mess and I wonder who will bail us out next time. If the Chinese stop lending to us we will face even bigger problems than we already have.