Westpac: Here's Why China Is Not Facing An Imminent Financial Collapse

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Westpac’s Phat Dragon publication is a must-read each week for China Watchers and this week it looks at the chance of an imminent financial collapse after they say they were “inundated with a deluge of enquiries” on the topic.

The general market bear theory is that the size of the debt mountain is too big for either the local or central governments to jump over. As a result, it is only a matter of time until China experiences its tipping point and falls into a credit crash/debt spiral along the lines of the US sub-prime crisis.

But as Europe showed in 2010 and 2011, predictions of credit crashes for sovereign governments are made far more often than they occur.

Add in the fact that the Chinese economy is still growing strongly. Westpac says “Nominal GDP grows at 9.5% pa (7% real and 2.5% inflation)” and the preconditions are there for China to outgrow its debt pile and see it shrink as a percentage of GDP from 21% to 17.5% in 5 years’ time.

As Phat Dragon says: “Nominal growth that far exceeds borrowing costs is a wonderful thing for the sustainability of public debt. Amen.”

Amen indeed – global investors will be very hopeful that Phat Dragon’s analysis is correct.

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