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With the S&P 500 up 5.3% over the last week, many investors are hopeful that the markets have finally turned around in 2016.
But even though the markets are up this week, there are some major bear market warning signs that cannot be ignored…
Global markets officially fell into a bear market last week. The definition of a bear market is a decline of 20% or more from a recent high.
On Feb. 11, the MSCI All-Country World Index slipped 1.3%. That pushed its decline since May to 20%. It also marked the biggest risk retreat since Europe's sovereign debt crisis in 2011.
Every global industry has fallen since last year's record high. The sharpest sell-off has been in financial stocks, where declines surpassed 25%. Energy and commodity-related equities have suffered swoons of 30% or more.
Worries of a global recession, the plunge in oil prices, escalating defaults from energy companies, and the uncertain path of U.S. interest rate increases have all contributed to the 2016 bear market.
And the U.S. Federal Reserve's January meeting minutes released Wednesday show policymakers are worried that global woes could rattle the U.S. economy. Policymakers said global risks may make them rethink their planned path of interest rate hikes in 2016.
U.S. central bank committee members said they would closely monitor global economic developments, as well as oil prices and stock prices.
But one of the biggest threats to the U.S. and global stock markets is China – its banking system in particular. And it's the biggest bear market warning sign we've seen in 2016…
Bear Market 2016: China's Banking System Is a Disaster Waiting to Happen
When it comes to global bear market warning signs, this is the biggest in 2016…
China's banks granted loans at the fastest pace on record in January.
According to UBS economist Tao Wang, China's banking loan assets now sit at a startling 290% of GDP. In January, new local-currency bank loans set a monthly record at $385.40 billion.
Many Chinese banks, despite their size and high levels of lending, struggle to price loans according to the risks individual borrowers pose, global management consulting firm McKinsey & Co. explains. China's banks still lack this basic commercial skill largely because they have little incentive to develop it.
The banking system's inefficiency has a huge impact on the entire global economy…
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.
That's why so many analysts and investors are growing increasingly concerned about the 2016 bear market.
China is the world's second-largest economy. But growth in the Asian nation has been diminishing 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%.
Famous hedge fund manager Kyle Bass spoke about 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.
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.
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 this bear market in 2016, our experts have prepared a 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.
- Business Insider: The Fed Is Worried About Risks to the Economy
- Bloomberg: Bear Market Descends on Global Stocks
- CNN Money: America's Bull Market May End Soon, But…