Chinese GDP growth slowed to 7.7% last year, hitting its lowest level since 1999.
Some of the biggest issues we’re seeing in the headlines these days are concerns over shadow banking, rising local government debt, and trust defaults.
The credit crunch China experienced last year, and the worry that deleveraging could trigger a hard landing is also getting a lot of attention.
We asked six China experts the same question. What worries you the most about China? Here are their responses:
Alaistair Chan, Moody’s: “The central bank’s campaign to cut risky lending practices and over-leverage in the financial sector via monetary tightening is a big concern. The PBoC seems to have learned from the June 2013 Shibor scare, but it is still unclear how monetary tightening against a backdrop of potential defaults in corporate bonds this year will unfold.”
David Cui, Bank of America: “Debt growth and corporate sector solvency issue.”
Patrick Chovanec, Silvercrest Asset Management: “I’m worried that Chinese leaders actually believe it when they say everything is under control. The clock is fast running out on China’s tactic of using runaway credit to fuel investment-led growth.
“At best China faces a growth squeeze from a mounting burden of bad debt, at worse that bad debt will blow up in its face. Either way, China faces a wrenching economic adjustment. If China’s leaders recognise not just the direction but also the urgency of change, they have some hope of getting to the other side. If they kid themselves into complacency, they are courting disaster.”
George Magnus, Formerly UBS: “Among many things that worry me, the most urgent issue is if, how and under what circumstances China will tame credit creation and put a troublesome genie back in the bottle. We’ve had a few trust loan defaults that haven’t caused a big stir yet, but there have been a couple of depositor bail outs that don’t point to a determined attempt to curb the excess yet.
“There’s a tension between the PBoC and the China Banking regulatory Commission over shadow banking restraint. I expect credit to slow and to lead to slower growth. I worry that the authorities will try to soft pedal this, leading to a bigger denouement later.”
Jim Rogers, Rogers Holdings: “The high levels of debt in some areas. Some of the provinces and companies have built up debt in recent years during the recovery, since there has been so very much artificial liquidity all over the world. All the money printing in the developed world is causing distortions everywhere including China.”
Tom Orlik, Bloomberg: “The biggest worry about China this year is the state of the financial system. Massive credit growth has left banks overexposed, and as the economy slows the cracks are starting to show.”
Bill Bishop, Sinocism: “A. Environmental crises: air, water, soil, food. There are and will continue to be huge opportunities for investors and companies in cleaning up the mess, but the human toll is massive and will get worse before it gets better. It could lead to significant unrest but more likely will lead to cancer epidemics and emigration by those who can afford to;
B. Corruption. Xi’s crackdown on official corruption is serious and having an effect. Of course there are political reasons and scores to settle, but the crackdown has changed behaviour. It has not however addressed the corruption that is pervasive in Chinese society, and it is hard though to see how that can be changed materially in the midst of increasing restriction on public discourse and transparency;
C. Ideological retrenchment. No, Xi is not a “neo-Maoist”, but he is a pragmatic Marxist and there is a broader tightening of discourse and more aggressive rejection of “Western” values and Neo-liberalism than we have seen in a while. But most people here do not believe in Marxism and a Marxist morality campaign will not work. So the real glue is nationalism, and that has only grown stronger, intentionally, over the years;
D. Growing anti-foreign, and especially anti-American, sentiment as more and more people are told, and start to believe, that the West is trying to keep China down and prevent its rejuvenation. Tensions from an economic slowdown, economic reform/restructuring and/or the corruption crackdown and its political re-ordering could lead to even more external friction than would normally be expected with a rising power. Geoff Dyer’s new book “The Contest of the Century: The New Era of Competition with China” is worth reading.”
Note: We updated the post to include Tom Orlik’s view.
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