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One of the biggest stock market crash warning signs we've seen in 2016 has just come out of China. And now the Asian nation's banking sector looks like a disaster waiting to happen...
According to UBS economist Tao Wang, China's banking loan assets now sit at a startling 290% of GDP.
Here's exactly what that means...
You see, China's banking sector has grown so big that if just 10% of its outstanding loans were to default, that would be equivalent to erasing about 30% of China's annual GDP, or more than $3.5 trillion.
That scenario would require an urgent bailout of China's banking system, now the world's largest. China would need to use FX reserves or implement a major quantitative easing (QE) policy to recapitalize its banks, Wang said. China's official FX reserves, which include CIC (China Investment Corporation) holdings and policy bank recap funds, are already inadequate.
Extraordinary credit expansions over the past 10 years have helped fund massive and frequently inefficient infrastructure to inflate China's growth. Those could ultimately result in record losses.
And that's why so many analysts and investors are worrying about a potential stock market crash in 2016...
China is the world's second-largest economy. But growth has been waning over the last several years. Data released in January showed China's economy grew at its slowest rate in 25 years during 2015.
Full-year growth last year was reported at 6.9%, down from 7.4% in 2014. Several economists, however, say China's 2015 GDP rate was actually more like 4% to 6%.
And Wang's comments come on the heels of similar dire warnings made public last week...
How China Could Cause the Next Stock Market Crash
Legendary hedge fund manager Kyle Bass warned investors of China's fragile banking system on Feb. 10. Bass gained notoriety for correctly calling the U.S. subprime housing collapse that sparked the 2008 global financial crisis and stock market crash.
In a letter to investors, Bass wrote that a Chinese credit crisis would cause the country's banks to incur losses 400% larger than the wallop U.S. banks endured during the subprime mortgage crisis.
Bass explained that over the last decade, China's banking system has swelled to $34.5 trillion from a base of $3 trillion.
"China's [banking] system is even more precarious when we realize that, even at the biggest banks, loans are not made to borrowers based on their ability to repay," he wrote. "Instead, loan decisions are political decisions made by the state."
Bass said Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10% of assets.
"Historically, China has lost far in excess of 10% of assets during a non-performing loan cycle," he added.
While this latest 2016 stock market crash warning sign has investors panicked, Money Morning experts have been tracking these warning signs for months. In fact, Money Morning Capital Wave Strategist Shah Gilani raised concerns about China's mushrooming debt and volatile stock market last July.
And while many are fearing an imminent stock market crash, our experts have prepared a stock market crash and bear market survival guide for investors. It will help you protect your money, and even profit, when the markets begin tumbling. Get access to the full guide here.
- The Telegraph: China's Economy Grows at Slowest Pace in 25 Years, Latest GDP Data Shows
- CNBC: Bass: China Banks May Lose 5 Times U.S. banks' Subprime Losses in Credit Crisis
- Business Insider: Some Super Bears Are Now Expecting an Imminent Collapse of China's Banking System and Currency