JP Morgan’s Jing Ulrich has issued a harsh criticism of China collapse warnings in a recent note.
Basically, she believes China’s property market today is far less of a risk than America’s was before, due to the fact that most Chinese carry less debt than Americans. Thus they can weather a downturn more easily. Chinese banks also don’t have the subprime problem that American ones did.
Still, aren’t Chinese banks suspected of having other kinds of debt problems, such as toxic loans given out to Chinese industries?
Yes, but many of these loans have sovereign guarantees, she says:
We share many of the concerns about flawed incentives and overheating in the Chinese property market – but even if property prices were to undergo a correction, this would not trigger the type of economic and financial devastation that might arise in an over-leveraged economy.
Chinese bank loans for public sector investment projects carry implicit or explicit sovereign guarantees, and are thus almost akin to a bond issuance for a public works project… Looking ahead, while certain local administrations might struggle to service debt, the magnitude of public sector debt risks do not appear as severe as some have suggested.
Michael Schuman at The Curious Capitalist replies:
If local governments struggle to pay their debts, someone else has to, and the solution could be akin to a bank bailout by the central government. Perhaps such developments (if they ever happen) won’t spark a major crisis, but they do have a cost, and they could dampen investor sentiment, both at home and abroad, and that’s not good for the Chinese economy.
Yet he’s being too easy here.
The main problem is that any sort of Chinese financial crisis, even if it were less dramatic than that of America recently, would lead to job losses in China… and China’s system of government can’t handle job losses very well, because the government’s remaining legitimacy (since it ditched its original communist ideals) lies in economic growth alone.
No growth = no legitimacy.
The U.S. and Europe are having a hard enough time managing the social pressures caused by unemployment right now. And they at least have social release valves via their political systems. China doesn’t have this luxury.
Thus while a major China slow-down might not result in an insolvent financial system, or a property crisis of the scale just seen in the U.S., even a mild contraction of Chinese GDP (or even simply low growth, according to some) would lead to masses of people in need of employment — which means it could easily lead to riots.