Equity futures are under pressure this morning as concerns about a shadow-banking credit crunch in China increase. A Chinese credit-market risk gauge is hitting new highs amid growing concerns that leverage and credit risk have reached unsustainable levels.
Observers are comparing this to the widening in the Ted spread — a measure of risk in certain eurodollar securities compared with Treasuries — in 2007, which turned out to be a key precursor to the financial crisis. The comparison to the U.S. financial crisis was first observed last June, if not earlier. Goldman Sachs Group Inc. has noted that China’s “bond market has grown from virtually nonexistent into one of the world’s largest.” As of the end of 2013, local government debt had “swollen to 17.9 trillion yuan ($2.95 trillion), underscoring risks to the financial system.”