A coming Chinese bust?

China’s debt fuelled investment boom could be about to bust. If it did it would make the west’s recent downturn look like a picnic. At that time, China came to the rescue; now, western economies are not sufficiently robust to return the favour. China’s trade and investment overseas would create a massive domino effect.

What is changing?

Chinese debt is already equivalent to more than 200% of GDP, some say 250%. Credit in China is said to be growing twice as fast as GDP: therefore the country cannot grow its way out of debt. Its ‘shadow banking’ or off balance lending is also surging and more difficult to control. For example, banks now account for only 57% of local government debt/ credit, the rest if bonds or off balance loans.

Economists suggest that banking systems which lend large amounts of money against real estate will always result in too much credit. China and many other Asian economies are still experiencing real estate booms like never before: there is only one conclusion there. Where real estate markets have slowed, such as Vietnam, the government is taking steps to open up the market to overseas investors further to reignite growth. Oversupply, especially in high end investment apartments but also other forms is growing. People cashing in profits before it is too late could be the trigger for a collapse.

Implications

The overall total debt is about $23 trillion. At the same time the cost of borrowing is rising. The danger of a bust is real. Asia has been described as facing its Lehman Brothers moment.

And the west is indebted to China in more ways than one. In 2008, as China’s economy slowed and the west’s financial system was in a tailspin, the Chinese government, encouraged by the west, stepped in to invest: and invest they did. They grew their own and the world economy out of danger, then.

Some commentators suggest that the Chinese economy is now where the west’s was in about 2006, before it started going very wrong. If so, we could be in for a major, major economic bust. And this time, there would be no China to bail us out. China has become so dominant in many markets that resource led economies the world over would be hard hit. China has been investing heavily into western companies; those investments could be sold in fire sales for rock-bottom process, good for some but not the companies in question or global stock markets.

China’s unwritten pact with its people has been job security, economic growth and hope for the future in exchange for fewer freedoms. In a major economic bust, that tacit agreement could fail explosively into protests and civil unrest – the Chinese are already more willing to protest than ever before and mass unemployment with little or no safety net would be ample cause. The domino effect could result in similar busts and unrest throughout Asia, and even further afield in Africa and Latin America where Chinese investments and trade are major components of the economy.

How exposed are you to Chinese markets? How could you protect yourself in such a downturn? Innovation and a low cost base will be even more critical: are you investing for the future now, while being prepared for the worst by doing clear risk assessments?

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