At the beginning of 2018, the IMF announced that world debt levels hit a new record of $233 trillion. China accounts for the bulk of this debt, and while the country has made some progress slowing debt growth, leverage is still expanding.
Indeed, according to the IMF, China’s deficit rose by two percentage points last year to 294% of GDP, compared to an average annual increase of 17 percentage points in the 2012-2016 period.
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Following this growth, corporate debt has reached 165% of GDP. What’s of more concern, is the size of the country’s shadow banking sector. Full-year 2017 figures are not in yet, but Moody’s said in a recent report that China’s shadow banking assets grew more than 20% in 2016 equivalent to 86.5% of China’s gross domestic product. Growth slowed slightly in the first half of 2017 as nominal GDP grew faster than shadow banking assets, resulting in shadow banking falling to 82.6% of GDP as of June 2017.
Chinese Property Bubble: Set To Burst In The Next Four Months?
Declining shadow banking activity could be a result of policymakers’ efforts to control this section of the market. Beijing has proposed greater oversight on wealth management products, which were estimated to be worth some 29 trillion yuan ($4.39 trillion) at the end of 2016, 80% of which is off the books. The real number could be much higher.
But so far China has managed to silence its doubters. Two of the most vocal China bears are Jim Chanos and Kyle Bass. In an interview in 2016, both of these bears forecast a crisis for the country within the next 18 months, a development which, as of yet has not occurred:
“Speaking about the state of the banking sector, Kyle Bass said, “It’s the worst possible kind of assets, it’s 4x worse than we were at our peak in 2006. So for those that believe somehow that China, with a declining working-age population and a banking system that has been recklessly built…is going to grow at 6.5% from now on, or 8% nominally, I just think that they’re wrong and if you follow what’s happening right now, sometime in the next 18 months you’re going to see a real banking crisis in China. Even though they are a Communist Totalitarian Government, economic gravity takes over.”
Chanos went on to say:
“To amplify Kyle’s point…we think that their banking and shadow banking assets will grow somewhere around 20% this year. To put that in perspective: that will be new debt to the tune of $6-7 trillion in a $12trillion economy and I would dare say that if the US did a similar type of stimulus, say $10 trillion in new debt on a $17trillion economy, we’d be growing at 6% too. There’s no magic to this, literally almost half the economy is construction still, after all these years it’s still investment…it’s very similar to the Japanese model of the late 80s except this one is on steroids”
The trillion dollar question is, 14 months on from these forecasts, is it time to assume that China has got its debt under control or is it time to prepare for a collapse in the next four months?
Chinese Property Prices: Holding Up A Bubble last updated: 4th January 2018.
China’s property sector hold the key to region’s success, for better or for worse…
2017 was a year of surprises for China. Throughout the year, the country managed to beat expectations regarding growth and defied its doubters once again on exports. After dropping 8% in 2016, analysts at Australian investment bank Macquarie believe that export growth hit 8% in 2017.
The most prominent surprise, however, has been the unexpected appreciation of the RMB. Indeed, heading into 2017, it was widely believed that the RMB would depreciate in value by 5% to 10% during 2017. Instead of falling, the currency appreciated in value by 6% thanks to capital controls, a better economic performance, and robust export growth.
But what does 2018 hold for the region? The first few days of the year have already gotten off to a bad start for China bulls as leverage concerns have once again reared their ugly head.
It has emerged that China's HNA Group Co., the poster child of China's corporate sector debt-funded growth, has fallen behind in repaying loans it obtained from employees and individual investors. This development is widely being interpreted as a sign that the group cannot maintain its burgeoning debt obligations. If HNA fails, it's unlikely that there will be no fallout. The group has an estimated $100 billion in outstanding debt and has said about a quarter of it is coming due within a year.
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