Bond investing legend Bill Gross, formerly of PIMCO, now of Janus Capital, took a moment to weigh in on China.
On Wednesday he tweeted:
Gross: China’s credit expansion unsustainable. Use risk rally to de-risk.
— Janus Capital (@JanusCapital) February 17, 2016
For China bears, debt has become the central issue. On Monday, the country reported that it added a massive $522 billion in new credit in January. That’s up from $276 billion in December, and it beat expectations of $337 billion. Outstanding credit grew by 12.1% from the same time a year before.
As economist Michael Pettis pointed out in a recent blog post, we won’t know that China’s stuck the landing in its attempt to move from an economy based on investment to one based on consumption until it takes care of its debt issue.
Until then, we’ll know that heavily-indebted Chinese corporates are continuing to live on credit as “zombie corporates,” unable to turn a real profit. We’ll know that China’s difficult restructuring and overcapacity problems haven’t been tackled.
Those problems put the country’s $34 trillion banking system at risk. They are a drag on growth (which puts pressure on the Chinese yuan), and they worry investors, businesses and citizens who have been sending money abroad at a record rate.
So yeah, Gross is saying sell. It’s going to be messy.
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