From the WSJ, Changyong Rhee, director of the International Monetary Fund’s Asia and Pacific Department, argues the odds of Chinese financial crisis are low for three reasons:
1. China’s owes most of its debt to itself. True, China’s debt – some tallies put the sum of private and government debt at double China’s gross domestic product – is scary. How companies and local governments will manage to service that debt as growth cools and interest rates rise is a puzzler. The IMF’s latest Regional Economic Outlook, released Monday, predicts China’s economic growth will slow to 7.5% this year from 7.7% last year, then further to 7.3% in 2015.
…That means that if China’s currency falls further (it has dropped roughly 3% so far this year), it won’t necessarily cause a dramatic increase in borrowers’ debts in local-currency terms that then causes bankruptcies to snowball.
2. China’s government debt is low. Like many governments in advanced economies, Beijing runs a budget deficit. But that deficit is relatively small – about 2.1% of GDP. And total government debt, both those owed by the national government and China’s much more heavily indebted provinces, still add up to only about 53% of GDP, according to Bank of America Merrill Lynch. Compare that with the U.S., where government debt is roughly as big as GDP, or Japan, where government debt has ballooned to roughly 240% of GDP.
3. China’s slowdown, like its economy, is central planned. While it’s easy to overestimate the degree of control Communist Party leaders have over economic decision making on the ground, they nonetheless are able to exert their influence in a way that policy makers in the United States and other democratic nations can only envy.
I mostly agree but still see China ending this business cycle when a large enough credit event transpires. The first point is questionable in the corporate sector. The second and third points are both true but neither prevents a hard landing, rebound and subsequent permanent slowdown (see special report).
