Bank of America Warns Of 'Lethal' Damage To China's Financial System As Deflation Deepens | Ambrose Evans-Pritchard

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Image: bruegel.org"Deflation, Devaluation, and Default" loom in China this year. The denouement for Shanghai's bourse will not be pretty, says the U.S. bank.

Jan. 8, 2015 (Telegraph) -- China is at mounting risk of a financial crisis this year as growth sputters and deflationary pressures trigger a wave of defaults, Bank of America has warned.

The U.S. lender told clients that a confluence of forces are coming together that threaten to chill the speculative mania on the Shanghai stock exchange and to expose the underlying fragility of China’s $26 trillion edifice of debt.

“A credit crunch is highly probable,” said the bank in a report entitled “Deflation, Devaluation, and Default,” written by David Cui and Tracy Tian.

They said the country’s highly-leveraged companies cannot safely withstand President Xi Jinping’s drive to stamp out moral hazard and wean the country off excess credit, warning that the mix of slower growth and excess debt “could prove lethal for the financial system."

The report warned that it is rare for countries to escape either a financial crisis, or major bank failures, a currency upset, a sovereign crisis – or a mix of these – after letting credit grow at such vertiginous rates.