It seems as if the recent and rapid fall of the Chinese
stock markets has gotten a number of prominent financial experts to take notice
of what I have been getting at for some time. Certainly the drop in the
markets, resulting from a substantial slowing of the growth and coupled with
the immaturity of the markets, has been significant and required some firm
intervention from the government. However, as some are commenting recently, the
big threat is not a dropping stock market but rather the corporate debt in
China. Here are some comments from an article I read this morning:
Fast debt growth, opacity of risk
and pricing, and very high debt-to-GDP are a hazardous mix, S&P said. It
took an unprecedented series of measures to arrest the fall in China’s stock
markets, which are worth over US$8 trillion.
Tackling corporate debt may make
that seem like child’s play. “Managing the debt market is probably more
dangerous than the stock market as the scale of the debt market is bigger and
... the moral hazard is a significant issue,” said Bank of America Merrill
Lynch analyst David Cui. Reuters
We have all been reading about the troubles in Greece
recently, and the never ending discussions between the creditors and the Greek
government to find some solution. As much as we all know that the only real way
to solve the problem there is at least a partial debt write-off, they keep
coming to agreements for ever more financial aid packages that only serve the
purpose of reimbursing older debt. Each time the amount increases due to the
interest being charged on the debt, and so Greece just keeps slipping further
and further down as they implement austerity measures that keeps them from any
hope of economic growth. Well, to paraphrase a Swiss banker from back in the
90’s, that is just peanuts in comparison to what is happening in China.
Clearly there is concern for Greece today, but the
actual impact on the rest of the world is insignificant. There may be some
spill-over to other Mediterranean economies, but ultimately the world will go
on without a sneeze even if Greece sinks completely. China is a whole different
story. Since the 2008 global economic crisis initiated by the sub-prime debt
issues in the US, much of the recovery has been the result of the massive
growth in China. Not only has this helped China itself as well as the countries
around it, but as China has become a consumption society much like the US and
Europe it has subsequently become the driving force behind global economic
growth. World leaders will tip-toe around human rights issue with China so as
to not upset them and lose out on juicy economic deals. There is no hiding the
fact that the Chinese are also very much enjoying the situation where they have
become the center of the global economy.
As their economy has begun to show signs of weakness,
there has been no holding back in trying to promote further growth, and so the
corporate debt grows and grows through ever more opaque shadow banking
solutions. There is now concern on the stock markets in China that is currently
worth $8 trillion. The corporate debt is estimate at twice that: $16 trillion.
It is expected to grow to $29 trillion in the next five years!
I suppose there is some comfort to the fact that I am
now beginning to see articles on a fairly regular basis highlighting the
dangers of the Chinese economy. I just hope it is not too late that the world
notices, and no matter what is done now the possible Chinese economy collapse
is going to hurt more than anything we have seen in the last 30 years.
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