I’ve had some emails asking various questions about yesterday’s article asking “Is China the world’s biggest ever credit bubble?” Here are a few thoughts…
The ‘China bears’ have been wrong for years
Very true. There have always been doomsayers about Chinese growth and yet it still keeps going. The thing is, you need to look behind the curtain at that apparent resilience. If it’s organic growth, terrific, but if the growth comes from just piling on more debt, that’s a recipe for undermining resilience, not improving it. When debt increases by as much as three times the pace of GDP growth, that is unsustainable.
Is a China crash inevitable?
There are very few things I would like to call ‘inevitable’. I would say that I don’t believe the current Chinese growth model is sustainable, but while every other example of such a precipitous growth in corporate credit has ended badly in the past, we’ve not seen one in the same kind of command economy like China’s, where the government has levers it can pull that western-style governments can only dream about. I am definitely saying it pays to be conscious of it.
The Chinese government is on top of this
Yes, the government has announced a cutback on purchases of overseas assets by Chinese companies and is reigning in credit growth. Like I said, that’s one of the levers available to China that is not available elsewhere. The thing is, they could turn credit off altogether and there is still a worrying level of debt. They won’t/can’t turn credit off completely, so the risk is the debt keeps growing. The much vaunted government reserves have dwindled from more than US$4 trillion to about US$3 trillion from defending the currency – still an enormous backstop but they’ll need that and more if loans start turning sour.
Will a China crash affect Australia?
Yes, I believe it will, along with the rest of the world but especially those countries leveraged to the China growth story.
What are we doing about it?
There is no telling how long China’s growth will carry on for – it could be years. Trying to time things like that is notoriously difficult. The classic example is when Alan Greenspan, former head of the US Federal Reserve, made his famous remark about “irrational exuberance” in December 1996, yet the NASDAQ almost tripled from that point before crashing in March 2000. While we are slightly underweight Emerging Markets we are still invested in growth assets, but we will be watching things carefully.