Money Metals Exchange recently spoke with James Rickards, esteemed financial market analyst and best selling author of books including Currency Wars and The Death of Money for an extended interview focusing on Jim Rickards’ growing concerns in China. Jim Rickards recently published this widely circulated article in the Daily Reckoning warning of an enormous financial bubble in China. Elaborating on his concerns, Mr. Rickards notes:

“China had a reserve position of about $4 trillion dollars. That was the largest reserve position in the history of the world. Now just for the listeners benefit, what is a reserve position? It’s actually easy to understand. Imagine you make $50,000 a year and your taxes and your expenses and your rent and all the thing you gotta pay come to $40,000 a year and you have $10,000 left over. You put that in your saving account or you put it in the stock market or whatever… That is you surplus, that goes in your savings account. That’s your reserve. It’s no different for a country. A country exports things and gets paid in hard currency and then they import things and have to pay hard currency to get it and they invest oversees and people invest in them. So you have all these capital flows and trade flows going back and forth but if at the end of the day you have more hard currency coming in then going out, that’s your savings. Your national saving’s account if you want to think of it that way is your reserves… China had basically a $4 trillion reserve at the end of 2014. Today that number is about $2.9 trillion. In other words, they have lost about $1.1 trillion in their reserve position in… not quite two years. So the reserves are going out the door. Now people say ‘well you’ve got $2.9 trillion left, isn’t that a lot of money?’ Well it is a lot of money, except of the $2.9 trillion, about $1 trillion of that is not liquid, meaning, it’s wealth of some kind, it represents investment, but China wanted to improve their returns… So they invested in hedge funds. They invested in private equity funds, they made direct investments in gold mines in Zambia and so forth. So about a trillion of that is wealth but its not liquid. So now we are down to $1.9 trillion liquid. Well about another trillion is going to have to be held as a precautionary reserve to bailout the Chinese banking system. If you look at the Chinese banking system, private estimates are that the bad debts are 25% of the total assets… Banks usually run with 5% maybe 7% – 8% capital. Even if you said 10% capital, well if 25% of your assets are bad. That completely wipes out your capital. So the Chinese banking system is technically insolvent even though they don’t admit that. They cook the books, they take these bad loans. Lets say I am a bank and I have a loan to a state owned enterprise, a steal mill or something, and the guy can’t pay me, can’t even come close to paying me, and the loan is due. Well I say look ‘You owe me $300 million. Tell you what. I will give you a new loan for $400 million, but I’ll take the money and pay myself back the old loan plus the interest and then I’ll give the new loan a two year maturity and I’ll see you in two years. So if you did that in the US banking system you would go to jail. You are not allowed to do. You are throwing good money after bad… So with that as background for the Chinese banking system, people kinda shrug and say ‘can’t China just bail it out, they got all this money?’ Well the answer is that they could and they have done so before… but its going to cost a trillion dollars. So you have to put $1 trillion to the side for when the time comes to bail out the banking system. Well now you are down to $900 billion… Now you only have $900 billion of liquid assets to defend you currency, to prop of the Chinese Yuan. The problem is that the reserves are going out the door at a rate of… $50 to $100 billion a month. I’m (China) going be broke at the end of 2017. That’s what I mean by China is going to go broke…”

There is much more to the interview and we strongly recommend you listen to it below: