China's credit transmission mechanism is dead: Expert
John Rutledge, SAFANAD chief investment strategist, and Leland Miller, China Beige Book International president, share their thoughts on China's structural problems and whether the country is facing a banking crisis.
Miller told CNBC that the Chinese credit transmission mechanism has been broken for the past few quarters, and that central bankers there will have a hard time trying to resolve the situation.
(Read more: Are China's shadow banking woes exaggerated?)
"How do you do that while punishing intermediaries and teaching investors a lesson?" Miller asked on CNBC. "What you're probably going to have to do is slowly pull away the lemonade. This is a very difficult thing to do. We have come out very decisively over the past few quarters and said the credit transmission mechanism is dead."
John Rutledge, the chief investment strategist with Safanad, said Monday that China has a "structural" problem when it comes to the high-yield trusts. They don't carry any risk, and they've become the credit source of choice among smaller companies that can't secure capital from large Chinese banks, he said.
"The ways they've gotten [capital] is through these trust companies but also through these black market loans," Rutledge told CNBC. "And finding a way to feed those companies' working capital in a steady way is what China really needs to in order to guarantee long-term stability."
The troubles within Chinese credit markets, and the ripple effects in the U.S. stock market, are a sign of investors' "unwinding" positions in light of potential higher U.S. interest rates, Rutledge said.
By CNBC's Jeff Morganteen. Follow him on Twitter at @jmorganteen. Reuters contributed to this report.
Source: http://www.cnbc.com/id/101366393
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