Source considers the good and the bad with China

China is now one of the largest economies in the world, and its spending power helped drag the western world out of recession following the financial crisis. This appears to have come at a price, however, and the fallout is being felt not only in China but throughout capital markets worldwide. That said, as we looked more deeply into the data, we discovered that it was not all doom and gloom.

The good

  • Chinese data is not as bad or as manipulated as many people believe
  • Banks are 90% funded by deposits, and capital ratios are acceptable
  • China is self-financing and has massive external assets
  • If needed, FX reserves and increased government debt could cover a large debt ‘black hole’

The bad

  • Total debt (230% of GDP) may both limit growth and present a systemic risk
  • The corporate sector has added debt equivalent to 50% of GDP in six years
  • Debt equivalent to 40% of GDP has been financed outside the banking sector since 2008

The ugly?

  • Chinese yuan (CNY) is expensive and could decline versus the US dollar
  • Chinese stocks are no longer expensive but recent policy actions suggest caution
  • China is unlikely to come to the rescue of commodity markets.

While the Chinese economy has almost certainly been decelerating, it was reassuring to see that the data produced in the country seems more reliable than many seem to think. This gives us greater confidence in being able to assess the prospects of China assets as well as the impact that Chinese fortunes may have on financial markets worldwide.

Paul Jackson is head of Source’s Multi-Asset Research

Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

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