Prem Westa of Fairfax Financial joins the bear camp of China observers:
Observers of China has big question marks about its remarkable credit growth in the last 5 years and they are wondering the 'errie resemblances between the 2008 credit crisis in the US and the 2014 debt markets of China' --- more observers has joined the bear camps recently, including Prem Westa of Fairfax Financial in Canada who wrote: There is a monstrous real estate and construction bubble in China which could burst anytime, It almost did in 2011 but China increased its credit growth significantly since then. This is a summary of the viewpoints of China bulls and bears. While the bulls are bullish about the long term prospects of China, the bears argue, the GDP growth target of China is 'unrealistic' and the policy mistakes of the past 5 years will result in a credit crisis in the near future. The skeptics of China argues: the collapse of the credit bubble in China might not be imminent but it might be drawing nearer to that point -- you can compare China in 2014 to what the Western world was in 2005-2006.
A full blown debt crisis for China might not be imminent. However, China is increasing its debt at a rapid rate (replicate the US commercial banking system in 5 years) and if it follow the current trend; its total debt to GDP ratio will be similar to Spain in 5 years. The stimulate effect on China's GDP for additional unit of credit is declining rapidly and this suggest the road of 'pumping up GDP with infrastructure investments' might end in the near future. I am not in the 'bear' observers camp, there is still time for China to re-adjust and avoid a debt crisis if it is willing to accept a lower rate of growth and focus on the 'quality' instead of 'quantity' of economic growth.
Viewpoints of the China bears:
- Travellers in China saw blocks of empty apartments everywhere that are sold but kept empty by 'investors'. The logic of real estate investments by Chinese is not generating 'income', the Chinese are focus on 'capital gain' and feared depreciation in their properties once their properties are occupied. Rental yields of apartment buildings in China is low -- once the expectation of rising prices reverse, we might see a glut of selling by 'investors'. The St Louis Fed published a report in 2013 claimed significant store of value demand for housing in China is speculative in nature; the bubble could burst when both the household income growth and saving rate start to decline and capital controls in China starts to relax. Predicting when and how investors lose faith in housing and how soon and fast these events will happen is difficult if not impossible
- The bears argue there are signs of overbuilding of housing in part of China. Ordos has replaced Fengdu as the 'Ghost city of China' and this is well documented by foreign media. The bears argue China has been building the wrong type of housing for its people -- they point to the fact that there are not enough social housing or affordable homes for its vast population of migrant workers and middle class and too many luxury apartments has been built for investors as 'deposit boxes with windows'. Some analysts in Hong Kong estimated 15% of the housing stock in China remains 'unoccupied', pointing to the fact that speculation in housing might be rampant.
- a significant jump in bank balance sheet and credits over the last 5 years, China's credit jumped from $9 trillion USD in 2008 to $23 trillion USD in 2013. Bank credit has been rising faster than the GDP in 2013, bank credit growth rate @ 12% to 14% vs GDP growth of 7% to 7.5%. Each extra dollar of credit has added 0.17 in GDP in 2013, this ratio was 0.29 in 2012 and 0.83 in 2007. The bears argue, China will run its broken model of 'investment led growth' to the ground and not making changes until the end game begins -- China is following the footsteps of the Americans in 2008.
-China's credit market is showing signs of strain. There are occasional spikes in inter-bank lending rate (Shibor) when rumours of corporate defaults are floating around. The bears argue we might see a rising trend of defaults in the high yield debt and credit products of the shadow banking sector later in 2014. Even George Soros has called the 'eerie resemblances' between the 2008 banking crisis and China's debt market in 2014.
- Government GDP targets are too high -- they set their targets at 7.5% and the trick to keep this pace of growth is throwing money in 'fixed asset investments' . The bears argue GDP growth might drop to 4% to 6% when China shrink its target growth in fixed asset investments and slow down its credit growth to a sustainable rate. In a hard landing scenario, China might experience two quarters of negative GDP growth and then follow by a sustainable path of growth of 4% to 5%. Some economists who are sceptical about the growth model of China argue, China should focus on income growth of its people and not on rate of GDP growth, they argued China can achieve its goal with sustainable growth rate of 5% while increasing the income of Chinese at 7.5% per year via redistribution of wealth from the State to its own people (via higher wages, higher interest rate on deposits and gifting state owned assets).
Viewpoints of the China bulls:
- rebalancing is well underway in China. The service sector contributed 46% of GDP in 2013, surpassed the manufacturing sector (44%) for the first time in history. The fastest growing sector in 2013 was 'wholesale and retail'. Consumption contributed 50% of Chinese GDP growth in 2013 --- capital formation contributed 54% and net export (-4%). The bulls argue China is well on its way in re-balancing to 'consumption led growth' with the service sector leading the way.
- loan growth by Chinese banks are significant but the banks in China are healthy --- they have healthy capital ratios, their non performing loans ratios are low (Chinese banks reported non performing loans ratio of 1%) and the shadow banking system is 'well regulated'. The pace of loan growth is 'under control'. For 2013 the total social financing aggregate grow 9%, slowed sharply from 23% in 2012, this pointed to the fact that China has been reining in credit growth and growth in shadow banking.
- China experienced a giant increase in debt over the last 5 years but the total debt ratio is low compare to other industrialised countries. China's total debt ratio was 215% in 2012, well below UK or US at roughly 350% of GDP and Spain @ 400% GDP. China made vast investments in areas like highways, subways, high speed rails, hospitals, apartments --- China is a developing economy and its per capita share of these facilities are well below the standard of developed countries like the US. You can argue the rate of debt growth is unsustainable but this is already under control and the investments made by China will bear fruits in the future.
- The bulls argue, the model of old China is dead --- while the new China is still growing at a rapid pace and will eventually take over as the growth engine of the future. 'the service sector, renewable energy, information technology, high end manufacturing, health care' The bulls argue, China will drag on with growth rate of 6% to 7% for the near future, they argue the investment led growth model is working and the bears were wrong when they called the 'end of China' in 2011.
- The bulls argue there are no real estate bubble in China, prices are high because income of Chinese are rising at a rapid pace and the growing ranks of middle class are lining up to jump in and buy. In fact, the trend of rising price is still going on in China and those who made investments in real estate will be winners. The bulls point to the fact that the Pudong district of Shanghai was once the 'ghost city of China' and today it is the heart of Shanghai.
BBC Documentary - How China fools the world:
http://www.youtube.com/watch?
GDP Growth of China
http://www.reuters.com/
The Changing debate over China's economy (Michael Pettis)
http://blog.mpettis.com/2013/
The Great Chinese housing boom -- Federal Reserve Bank of St Louis
http://research.stlouisfed.
The $15 trillion shadow over Chinese banks
http://www.telegraph.co.uk/
China loan creation tumbles
http://www.zerohedge.com/news/
Prem Watsa's 2013 shareholder Letter
http://www.
How 2014 could be like 1929
http://
SoGen Hard landing scenario China
http://www.businessinsider.
A full blown debt crisis for China might not be imminent. However, China is increasing its debt at a rapid rate (replicate the US commercial banking system in 5 years) and if it follow the current trend; its total debt to GDP ratio will be similar to Spain in 5 years. The stimulate effect on China's GDP for additional unit of credit is declining rapidly and this suggest the road of 'pumping up GDP with infrastructure investments' might end in the near future. I am not in the 'bear' observers camp, there is still time for China to re-adjust and avoid a debt crisis if it is willing to accept a lower rate of growth and focus on the 'quality' instead of 'quantity' of economic growth.
Viewpoints of the China bears:
- Travellers in China saw blocks of empty apartments everywhere that are sold but kept empty by 'investors'. The logic of real estate investments by Chinese is not generating 'income', the Chinese are focus on 'capital gain' and feared depreciation in their properties once their properties are occupied. Rental yields of apartment buildings in China is low -- once the expectation of rising prices reverse, we might see a glut of selling by 'investors'. The St Louis Fed published a report in 2013 claimed significant store of value demand for housing in China is speculative in nature; the bubble could burst when both the household income growth and saving rate start to decline and capital controls in China starts to relax. Predicting when and how investors lose faith in housing and how soon and fast these events will happen is difficult if not impossible
- The bears argue there are signs of overbuilding of housing in part of China. Ordos has replaced Fengdu as the 'Ghost city of China' and this is well documented by foreign media. The bears argue China has been building the wrong type of housing for its people -- they point to the fact that there are not enough social housing or affordable homes for its vast population of migrant workers and middle class and too many luxury apartments has been built for investors as 'deposit boxes with windows'. Some analysts in Hong Kong estimated 15% of the housing stock in China remains 'unoccupied', pointing to the fact that speculation in housing might be rampant.
- a significant jump in bank balance sheet and credits over the last 5 years, China's credit jumped from $9 trillion USD in 2008 to $23 trillion USD in 2013. Bank credit has been rising faster than the GDP in 2013, bank credit growth rate @ 12% to 14% vs GDP growth of 7% to 7.5%. Each extra dollar of credit has added 0.17 in GDP in 2013, this ratio was 0.29 in 2012 and 0.83 in 2007. The bears argue, China will run its broken model of 'investment led growth' to the ground and not making changes until the end game begins -- China is following the footsteps of the Americans in 2008.
-China's credit market is showing signs of strain. There are occasional spikes in inter-bank lending rate (Shibor) when rumours of corporate defaults are floating around. The bears argue we might see a rising trend of defaults in the high yield debt and credit products of the shadow banking sector later in 2014. Even George Soros has called the 'eerie resemblances' between the 2008 banking crisis and China's debt market in 2014.
- Government GDP targets are too high -- they set their targets at 7.5% and the trick to keep this pace of growth is throwing money in 'fixed asset investments' . The bears argue GDP growth might drop to 4% to 6% when China shrink its target growth in fixed asset investments and slow down its credit growth to a sustainable rate. In a hard landing scenario, China might experience two quarters of negative GDP growth and then follow by a sustainable path of growth of 4% to 5%. Some economists who are sceptical about the growth model of China argue, China should focus on income growth of its people and not on rate of GDP growth, they argued China can achieve its goal with sustainable growth rate of 5% while increasing the income of Chinese at 7.5% per year via redistribution of wealth from the State to its own people (via higher wages, higher interest rate on deposits and gifting state owned assets).
Viewpoints of the China bulls:
- rebalancing is well underway in China. The service sector contributed 46% of GDP in 2013, surpassed the manufacturing sector (44%) for the first time in history. The fastest growing sector in 2013 was 'wholesale and retail'. Consumption contributed 50% of Chinese GDP growth in 2013 --- capital formation contributed 54% and net export (-4%). The bulls argue China is well on its way in re-balancing to 'consumption led growth' with the service sector leading the way.
- loan growth by Chinese banks are significant but the banks in China are healthy --- they have healthy capital ratios, their non performing loans ratios are low (Chinese banks reported non performing loans ratio of 1%) and the shadow banking system is 'well regulated'. The pace of loan growth is 'under control'. For 2013 the total social financing aggregate grow 9%, slowed sharply from 23% in 2012, this pointed to the fact that China has been reining in credit growth and growth in shadow banking.
- China experienced a giant increase in debt over the last 5 years but the total debt ratio is low compare to other industrialised countries. China's total debt ratio was 215% in 2012, well below UK or US at roughly 350% of GDP and Spain @ 400% GDP. China made vast investments in areas like highways, subways, high speed rails, hospitals, apartments --- China is a developing economy and its per capita share of these facilities are well below the standard of developed countries like the US. You can argue the rate of debt growth is unsustainable but this is already under control and the investments made by China will bear fruits in the future.
- The bulls argue, the model of old China is dead --- while the new China is still growing at a rapid pace and will eventually take over as the growth engine of the future. 'the service sector, renewable energy, information technology, high end manufacturing, health care' The bulls argue, China will drag on with growth rate of 6% to 7% for the near future, they argue the investment led growth model is working and the bears were wrong when they called the 'end of China' in 2011.
- The bulls argue there are no real estate bubble in China, prices are high because income of Chinese are rising at a rapid pace and the growing ranks of middle class are lining up to jump in and buy. In fact, the trend of rising price is still going on in China and those who made investments in real estate will be winners. The bulls point to the fact that the Pudong district of Shanghai was once the 'ghost city of China' and today it is the heart of Shanghai.
BBC Documentary - How China fools the world:
http://www.youtube.com/watch?
GDP Growth of China
http://www.reuters.com/
The Changing debate over China's economy (Michael Pettis)
http://blog.mpettis.com/2013/
The Great Chinese housing boom -- Federal Reserve Bank of St Louis
http://research.stlouisfed.
The $15 trillion shadow over Chinese banks
http://www.telegraph.co.uk/
China loan creation tumbles
http://www.zerohedge.com/news/
Prem Watsa's 2013 shareholder Letter
http://www.
How 2014 could be like 1929
http://
SoGen Hard landing scenario China
http://www.businessinsider.
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