Ever vigilant for another financial crisis, I have fretted about the possibility of a simultaneous commodity crisis, currency crisis, and credit crisis.  My conclusion was that the possibility of another recession may have increased but not necessarily the possibility of another financial crisis.  Part of my thinking was that the much-discussed Chinese banks are not the zombie banks that we all fear, despite all that has been written recently about the bad loans.

The totalitarian central government of China is able to help certain companies or, more importantly, certain local governments by requiring banks to lend to them, whether the bank thinks the borrower is creditworthy or not.  This is quicker and more clandestine than just supporting the localities or companies directly with taxpayer money.  But, the level of bad loans has reached a dangerous point.

The central government has put a ceiling on loans to localities at 16 trillion yuan ($2.45 trillion).  In addition, they are now rolling off higher-rate, shorter-maturity bank loans into lower-rate, longer-maturity bonds sold to the public.  While debt is still debt, some debt is worse than other debt.  China is converting very bad debt into slightly bad debt.  The distinction is important, because it improves the health of Chinese banks, if not the new bondholders.  Albeit small, the risk of a Chinese credit crisis just decreased.  More changes should be expected.

Isn’t it nice when a decision can be made?

Isn’t it nice when fiscal policy and monetary policy work together?