China's record debt has economists worried http://money.cnn.com/2009/11/10/news/international/china_debt.fortune/index.htm The nation is taking on record levels of debt to keep its economy humming. Some say that can't last. By Bill Powell, contributor Last Updated: November 11, 2009: 12:21 PM ET (Fortune Magazine) -- In a world still awash in economic worry, China has stood apart as the one country that has come through the global slump with only the briefest of hiccups. Last quarter the nation grew at a brisk 8.9% rate, and many economists expect it to expand even faster over the remainder of the year. Profits at large, state-owned companies that have benefited from Beijing's aggressive stimulus program are up sharply. Li Xiaochao, spokesman for the National Bureau of Statistics, summed up the zeitgeist in China these days: "The overall situation of the economy is good." A lot of global CEOs, of course, are on the thank-God-for-China bandwagon, and it might seem a little churlish to question one of the world's few good-news economic stories. Yet a growing number of observers believe that China is creating its own bubble economy. And they have a case to make. The U.S. fueled its housing and consumption bubbles by providing easy credit. China seems headed in the same direction, although the victims would be different this time. In the first nine months of the year, Beijing has shoveled $1.27 trillion in new loans into the economy, up 136% from the same period last year. That money has gone to three main areas: infrastructure, manufacturing, and real estate. According to a recent analysis by Monaco-based hedge fund Pivot Capital Management, China's total lending reached 140% of GDP at midyear. That kind of lending makes China an "outlier" compared with other BRIC (Brazil, Russia, India, and China) countries -- and is already well beyond the levels that "have led to sharp and brief credit crises in the past," the Pivot Capital report contends. Moreover, an increasing number of Chinese loans are being funneled into projects unlikely to generate an attractive economic return. From 2000 to 2008 it took just $1.50 in new credit to generate $1 of GDP growth. Now that ratio is 7 to 1. (In the U.S., just before the financial crisis hit, the ratio was only 4 to 1.) That's because the loans are creating huge amounts of manufacturing capacity -- which is unneeded in the bears' view. China's spare capacity in the cement industry, for example, equals the total annual consumption in the U.S., Japan, and India combined. So where will the growth come from? China's export markets are tapped out. Its domestic consumption, stalled at around a third of GDP, hasn't yet started to rise significantly. Additional manufacturing investment would be crazy, leading arguably to a global deflationary bust of epic proportions. Over the past decade China has spent massively on roads, bridges, and other infrastructure. Some economists believe China's infrastructure, already superior to that of many other developing economies, has now passed the point where more investment can contribute much to growth. China, in other words -- despite the rosy, headline GDP numbers -- might be stuck. Those bullish on China say the government will keep spending no matter what to keep the economy humming, given its relatively healthy domestic balance sheet compared with that of the U.S. Skeptics reply that if the debt taken on by provincial governments is taken into account, China's fiscal health begins to look questionable. The good news is that the authorities are well aware of the problems. Behind the scenes, Chinese officials are engaged in an increasingly rancorous debate about whether and how quickly to take away the credit-filled punch bowl. Lending has slowed a bit from the red-hot levels in the first half, and recently China's National Development and Reform Commission, a key government policymaking body, said it would begin to deal with excess capacity in key sectors of the economy by forcing mergers and in some cases ordering factories to close. So, yes, Beijing may be working hard to keep its economy vibrant, but danger lurks out there. Avoiding an American-style meltdown is the economic test that's coming. First Published: November 11, 2009: 9:14 AM ET
jim chanos (famous short seller of enron) is getting bearish on china. he highly values this piece of research from pivot capital: http://www.pivotcapital.com/reports/Chinas_Investment_Boom_the_Great_Leap_into_the_Unknown.pdf i've been in china recently and the consensus is growth and capex and rebound and "there's 50% upside to the latest bull market high" everyone spoke about stocks and communist party would help everyone out. it was definetly hot there. i would not short china because it can become a bubble (and because there are no instruments as far as i know) but will stay alert
Once China nosedives the volatility in global markets could be unprecedented, considering China's current role in fixing global exchange rates, US bond prices and their consumption of global commodity production. They have multiple trillions of dollars at work fixing a system in place that might have a completely different equilibrium otherwise. I have no bet on the timing, just at some point it may happen. The possibilities of capitalizing on just a part of the volatility - should it materialize - are simply mouth watering.
China's GDP growth is bogus--how can a country that relies heavily on exports, and then lose significant portions of those export markets, still keep growing? Only by spending its own internal reserves or borrowing money, and that's not productivity. When China falls on its face all these investment guru's will have egg on their face.
Going long and short currencies, G7 gov. bonds and all major commodities. Specifically in currencies I would expect epic moves. I don't know which direction, but the market will tell us once it unfolds, giving all of us plenty of time to place our bets. The magnitude and duration of the moves could be much deeper and longer than most believe, depending on how critical China really is for the global financial system. We don't know the actual degree of importance for certain now (there's just lots of speculation, from China being "irrelevant" to being the "motor of global growth and stability"), but we will know more if/when/after it all has played out.
Given how much China has been supporting EUR/USD (through buying) and USD/CNY (through buying) and AUD/USD (again, buying) and lastly gold, I think we can take a wild guess at what would happen.