China & Credibility

In previous chapters, I raised a lot of questions about China, now we try to find the answers.

Is a stock market crash in China likely?
Yes, almost for sure.

Is a global economic crises likely?
Yes, and the risk is rising.

I have never been to mainland China, but several times in Hong Kong before the handover and after.
The effects of the change of Hong Kong’s sovereignty from the UK to China in 1997 made me curious and when visiting Hong Kong in 1999, I questioned a few of my countrymen, usually in finance- or hotel-management positions, just about that.
Basically, they said, there was not a great deal of change in their everyday life, but they noticed a particular difference between mainland chinese and chinese grown up in Hong Kong.
Chinese from the mainland have an adamant trust, that the government, aka chinese communist party, is capable to overcome each and every challenge the economy faces, in fact is in charge to solve each and every problem of the huge chinese population.

Well, the unprecedented economic growth of China since 2000 only confirmed that trust so far.
But, that could change – starting with a stock market crash that resembles the 1929 crash of Wall Street. The overheated property market could be the trigger, since Chinese real estate represents around 23% of GDP, that’s three times that of the US at the height of its real estate bubble. Moreover, tons of debts in private hands that grows faster than the economy and millions of inexperienced first-time investors – everything but a real stock market crash to the tune of 30, 40 or even 50 percent would be a real surprise.

But the current economic problems in China go much deeper and are so huge, that many observers predict, not even the almighty communists in Beijing will be able to solve them:

The Debt
China’s total debt has nearly quadrupled, rising to 28 trillion USD by 2014, from 7 trillion USD in 2007. China’s debt as a share of GDP is larger than that of the United States or Germany. According to the consulting company McKinsey, half of all loans are linked, directly or indirectly, to China’s overheated real-estate market and the debt of many local governments is unsustainable.

The Banks
Bad loans went up 30 percent in the first half of 2015, this is according to China’s banking regulator. But the unregulated shadow banking system accounts for nearly half of new lending. The doubts are growing about the ability to withstand the economic slowdown. The amount of bad debt piling up in China led many to believe the country could sink into decades of stagnation like Japan after its credit bubble burst. In other words – China is facing a systemic credit crisis.

The Credibility
As if those numbers weren’t bad enough, in reality they might be even worse. Violet Ho, a senior managing director for the risk-consultant Kroll said according to Bloomberg: “If I have one piece of advice for people worrying about the financial status of Chinese companies, it’s this: it’s right to be worried. Often a credit report for a Chinese company is not worth the paper it’s written on.”

And the challenges for the chinese government go far beyond economics. I would just mention the disastrous quality of life the chinese population suffer through extreme air-pollution or poisoned food. No wonder, Chinas best and brightest leave the country and contribute to a dangerous brain-drain.
The reaction of the country’s rulers so far is to press hard on any buttons available to restimulate the economy. They also started an anti-corruption campaign that seems to deserve this name. And they took millions of cars off the streets to get a blue sky over Beijing for once – but only for a large military parade that marked the 70th anniversary of Japan’s defeat in World War II.
But the communists in China’s capital missed so far to press hard on the right button: Deep structural reforms to shape a modern economy and society.
Well, I sincerely hope, China’s rulers are at least capable to steer the debt-situation into calm waters and restimulate the economy, which now accounts for 15% of global GDP and around half of global growth. A continuous slowdown in China into a Japanese style stagnation would lead to a global fallout with negative consequences for you and me.

Officially, you shouldn’t be to worried. Chinas expected growth will be “no less than 6,5% for the next five years” as Chinas President Xi Jinping announced in November 2015.

I am not in a position to comment that projection, but I can’t help to remember Johann Wolfgang von Goethe’s ‘Faust’: “I hear the message well but lack faith’s constant trust.”

From the global perspective, we return to our small world and look into our own portofel. The biggest mistakes people make with their money – read it here in the next chapter:

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