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.
- 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’
- 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
- 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