China overtakes taper as chief macro worry

Forty-six percent of fund managers surveyed by BAML view a sharp slowdown in China as their biggest worry, up from 37% last month, and 26% in December.

"China is getting serious about deleveraging,” wrote SocGen earlier this week in a report nicely summarizing the conventional wisdom. “This should make economic growth slower, but more balanced. There is a risk, however, that deleveraging gets out of control and leads to a hard landing, in which growth slows to 2% Y/Y at the trough.”

Paul Chan, CIO for Asia ex-Japan at Invesco, isn't buying it, noting predictions of a hard landing in China have been going on for several years. “A hard landing in 2014 for a country with the largest foreign-exchange reserves and the lowest government debt-to-GDP among major economies is highly unlikely ... Based on trade, capital flows and liquidity data, investors so far are willing to fund loan growth in China.”

This just in: After a sizable decline to start off 2014, the Shanghai Composite has been headed higher for the last month, up 1.1% last night and now in the green for the year.


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Comments (1)
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    There is a difference between events that were unpredictable, and events that were unpredicted simply because risks were ignored or misunderstood. For example, reference to China's low debt to GDP ratio ignores local government debt, debt issued by State Owned Enterprises, and debt guaranteed by the central government. And China's debt doesn't stop there. In total, their debt exceeds 200% of their GDP, and half of their GDP consists of unsustainable investment spending financed through the issuance of even more debt.


    And, its not just the quantity of debt that is a concern; the quality of this debt is even more suspect. Much of the surge in annual Fixed Asset Investment spending now equal to $4 trillion and that is L/T in nature has been financed with S/T high yield money market accounts yielding 10% to 20% or higher.


    China's inherently leveraged banks have already found clever ways to keep this debt off their balance sheets but Asset Management Companies whose purpose is to buy bad loans [including accounts receivable that have also soared] from banks, corporations, local government financing platforms, and real estate developers, etc. are springing up in every province of the country to supplement the four large AMC's that the government formed to "address" these bad loans. Some investors seem to be excited about this new growth industry given that one of these AMC's, Cindia, was able to go public last year in the largest IPO on the Hong Kong stock exchange for 2013.


    In addition to sweeping all these bad loans under the rug--a giant Oriental carpet of sorts--the PBOC has also been printing money like mad. Much is made of China's huge foreign reserves [that largely represent yet another example of capital misallocation] but its often not understood that these reserves were purchased with newly printed renminbi that, until the BOJ fired up its printing press, had accounted for 45% of the growth in the global money supply since 2007. This helps to explain why China's M2 money supply now equals a whopping $18 trillion which is 225% of their GDP that has been temporarily inflated by debt-fueled investment spending.


    In the past the PBOC was able to minimize the cost of printing so much money in part to finance large holdings of low interest rate sovereign debt issued by the US and other countries by suppressing the yields on bank savings accounts. But, since those bank savings accounts must now compete with 10% to 20% yields on money market accounts that sprung up through shadow banking channels over which the central government has lost control, the cost to finance an unecessarily large Fx Reserve balance could grow. This would further constrain the PBOC's ability to print more money to address its growing debt problem of which it has recently become keenly aware, even though some investors still choose to ignore it, or believe that it is all part of some visionary long-term strategy.


    In civil engineering and the ability to authorize the unchecked government spending needed to complete huge construction projects in record time, the Chinese get high marks. In sound financial management and transparent accounting, they are years behind in implementing urgently needed reforms.
    21 Feb 2014, 08:12 AM Reply Like
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