Too Much Debt, but No Lehman Moment for China
Not a day goes by without talk and commentary about China’s debt situation. Yesterday, it was Société Générale’s Yao Wei sounding the alarm bell, this time it is Paul Krake from View From the Peak investment research.
“We had a false start in a rebound in Chinese economic in the first quarter of the year… The Chinese leadership is very concerned about the current debt dynamics in China,” he said in an interview with RealVisionTV.
Activity rebounded a bit during the first quarter, thanks to a record amount of new debt, but this stimulus is already wearing off again and Krake thinks the Chinese regime won’t engage in continuous stimulus and debt expansion.
“Any thoughts or hopes of a large credit-fueled stimulus from Beijing is barking up the wrong tree. As a result, aggregate demand globally is going to be poor.”
And even if China succeeded in changing its economy from capital investment to consumption, the transition will take a long time, slow down Chinese growth and hurt other emerging markets.
“Unfortunately for China and more unfortunately for the world is that no one outside China wins in a world dominated by Alibaba and Ping An insurance. Brazil doesn’t care if the Chinese buy more insurance policies. Indonesia doesn’t care if more Chinese are going to the movies or buying stuff online. The emerging world is still very much dependent on Chinese fixed asset investment and that is in structural decline.”
Nevertheless, Krake thinks the Chinese regime has means and ways to manage a debt crisis, similar to Société Générale’s analysis of a possible debt restructuring.
“We are not in a crisis mode. China has a lot of debt and we all know that,” he says. But: “The Lehman- style moment that many are espousing is not going to occur.”
The same goes for the management of the currency, where many speculators are betting on a large one-off devaluation of the yuan.
“I don’t really see a one-off disorderly devaluation of the yuan coming. The Chinese have plenty of policy tools, both draconian and market related, to stem the flow of capital flight.”
These tools don’t change his opinion on whether the world should buy China now or not: “China is broadly uninvestable.”