17 Reasons Why Experts Are Convinced China's Economy Is Doomed

china gdp

Economists and investors around the world are finally getting used to the idea that China’s years of blazing hot growth are a thing of the past.

While GDP will continue to be above average for years to come, China’s policymakers are pushing reforms to cool its housing market, legitimise its financial system, reduce corruption, and rebalance its economy as one driven consumption, not exports.

However, the cost of all of these efforts is slower growth. And with public and private financial liabilities sky-high, more and more experts are worried that China will experience a hard landing, a scenario where the economy decelerates to roughly less than 5% causing unemployment to spike and social unrest to sweep the cities.

As you can see from the chart above, GDP expectations are coming down quickly. And behind those numbers are disturbing trends in demographics, credit, housing, and other fundamental factors that are supposed to fuel the Chinese economy.

Private sector leverage is at a level that puts China at risk of a credit crisis.

'Private sector leverage is 17% above trend and on BIS analysis when its gets 10% above trends, there is a risk of a credit crisis.'

-Credit Suisse

China's state-owned enterprises have uglier balance sheets than junk-rated US companies.

'China is not unique in having experienced rising corporate leverage in recent years -- the same can be seen in other parts of Asia as well as both the US and EM -- but the pace and magnitude makes China stand out (see Leveraged China, May 3, 2013). Bottom-up corporate data -- less controversial perhaps than the official macro data -- suggests that leverage increase has been driven by the SOE sector which on average has tripled leverage in the past five years and which, at 4.6x gross has higher balance sheet leverage than, for instance, US sub-investment grade companies.'

'Leverage in the private sector is higher as well, although not as aggressively, and with some dispersion which often relates to the demand trend of the industry. For instance, the property sector which has seen strong sales volumes has maintained more stable credit metrics than, say, the capital goods sector which is suffering from severe excess capacity.'

-Morgan Stanley

China has the most levered companies in all of Asia.

'China's corporate sector is the most leveraged and solvency-challenged.'

-Stephen Green, Standard Chartered

China also has the fastest pace of credit growth in the Asia-Pacific region.

'China stands out prominently for its increased leverage.'

-Stephen Green, Standard Chartered

Credit growth has been outstripping economic growth for five quarters. This is particularly troubling.

'In the first quarter, China's total credit growth -- bank loans, shadow banking credit and corporate bond together -- accelerated to the north of 20% yoy, more than twice the pace of nominal GDP growth. This gap has been widening since early 2012.'

-Wei Yao, Societe Generale

SocGen economists recently estimated China's debt service ratio at shockingly high 29.9% of GDP.

'At the macro level, we estimate that China's debt servicing costs have significantly exceeded underlying economic growth. As a result, the debt snowball is getting bigger and bigger, without contributing to real activity. This is probably where most of China's missing money went.'

'A fast rising debt load of an economy suggests either deteriorating growth efficiency or high and rising debt service cost, or in many cases both. There is clear evidence that China is suffering from both of these. We have written extensively on the point of declining growth and summarized the causes as: 1) excess capacity resulting from inefficient investment in the past and 2) increasingly marginalized private sector.'

-Wei Yao, Societe Generale

Stock prices are tanking and default risk is surging.

'Global investor sentiment towards China is extremely negative currently. One way to illustrate this is the bid for China sovereign CDS protection. In recent trading this has reached 150 bps at the 5 year maturity approaching the highs seen during the 2011 hard landing / property crash concerns (see Exhibit 9).'

Morgan Stanley

Short-term interest rates have become extremely volatile.

-Ting Lu, Bank of America Merrill Lynch

Even the highest rated companies are watching borrowing costs spike.

'Sectors with high gearing/leverage would be the most impacted in a deleveraging/rising interest rate environment. Corporate bond yield for typical AAA 1-year debt has risen by 140 bps in the last 3 weeks (see Exhibit 26). This is likely to have an impact on highly geared companies via refinancing pressure on the expiring debt and rising interest cost.'

-Morgan Stanley

Policymakers have been moving aggressively to clamp down, which means there will be limited relief for surging interest rates.

-Morgan Stanley

Meanwhile, China's currency has been strengthening, making its exports less competitive.

'The pace and scale of CNY appreciation will create further challenges for China's exporters. The latest dynamic has pushed both the CNY's nominal and real effective exchange rates to new highs (Figure 2). The NEER is 11.2% above its average for the past five years and 18.9% above its average for the past decade. China's slightly higher consumer price inflation than in key trading partners leaves the CNY's real effective exchange rate (REER) 13.5% above the five-year average and 23.4% above the 10-year average.'

-Stephen Green, Standard Chartered

Employment growth has stagnated.

-Stephen Green, Standard Chartered

China has the most expensive house prices in the world.

-Sober Look

And prices have only been going up.

-JP Morgan, Sober Look

Household debt is all about housing.

-Stephen Green, Standard Chartered

Demographic trends will act as a headwind to growth.

The working age population is shrinking as the size of its elderly population balloons. This is the result of China's one-child policy.

And to make matters worse, there are now signs food prices are rising.

Rising inflation limits the room for policy easing and reinforces our view that credit and money growth will continue to drop in coming months. We expect CPI inflation to remain at around 2.7% in Q3, then climb to above 3% in Q4. This will limit the ability of the Peopleā€Ÿs Bank of China to cut the benchmark deposit rate, which is at 3%. The rise in pork prices poses further upside risks to CPI inflation.

-Nomura

Here's a snap shot of China's woes

-Credit Suisse

And what's bad for China is bad for everyone else...

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