The Chinese Debt Pile And Downgrade
I have been for some time extremely worried about the build up of debt in the Chinese financial system and it seems that Moodys is finally moving on the issue. It has downgraded China from AA3 to A1. This is still regarded as well above investment grade and well away from Junk bond status which starts at BB1. However, there a reasons to be concerned, the main one being that GDP growth is slowing to the 6-6.5% figure if you believe the official statistics well down from the traditional 10% rate. The other concern is that a lot of this debt is built up in the corporate and household sector and lot of the corporate debt may well ultimately become government debt especially banking system debt.
2006 Q1 2016 Q3
Corporate 108.2% 166.2%
Government 26.3% 46.1%
Household 11.5% 43.2%
Total 146% 255.5%
Prosperity on borrowed money can continue for a long time but can end abruptly when the music stops. This is happening as house prices have rocketed, banks have gone on an incredible lending binge (and much of those loans may turn sour) and money is leaving the country as insiders try to get money out in advance of any potential collapse or crisis. The nightmare scenario is property starts to fall in price, non performing loans in the banking sector rise (due to falling property prices and bad corporate loans) and the shadow banking system which has grown rapidly in China also comes under pressure at the same time as the commercial banking system. There is an old adage "the longer a boom the bigger the bust" I personally would avoid exposure to Chinese shares and property for the foreseeable future.
Disclosure: None.