Practical analysis for investment professionals
02 July 2013

Is China Coming Off the Rails? (Podcast)

In the past month, many security analysts have begun asking whether the miraculous growth of the Chinese economy is headed for a standstill. While we were at a conference in Canada last week, we noticed that overnight rates in China had begun to spike, so we arranged to speak with Gordon Chang as soon as we got back to New York City. Gordon is one of the world’s experts on China and has authored a number of articles and books on the country, in addition to speaking to the media frequently. He spoke with me and my colleague Jason Voss about what’s happening in China, what we can expect to happen in the future, and how the market has evolved. In addition to speaking about the loans that Chinese banks have made and the curious ghost cities that have been popping up in China, we discussed the philosophy of the Chinese government and the relationship that their notable portfolio of treasuries has with the United States’ future. Check out the podcast below, and read on for a few clips from Gordon’s excellent Forbes column.

Reading this on mobile device? Click here to listen to the audio.

On the recent spike in overnight rates:

“The overnight repo rate in China has just hit 25%, an indication the credit market is now frozen. This month, liquidity tightened considerably. Two government bill auctions failed, and several banks defaulted on their interbank obligations. Overnight rates in the last few weeks surged to about 15% but had fallen back, settling in at just north of 7%. The 25% rate indicates credit is becoming unavailable. Nothing is going right for China at the moment. In the last few hours, the HSBC Flash PMI for June came in at 48.3, down considerably from the 49.2 final reading for May. The country’s problems are now starting to feed on themselves.”

And on the threats to the Chinese economy:

“And there is a broader issue. For more than four decades, Washington has sought to “engage” Beijing and bring it into the international community. Inside the existing geopolitical order China prospered, and in the past quarter century the people who have benefited the most from the American-led system are not the Americans but the Chinese. In a peaceful world the Chinese manufactured and traded their way up through the ranks of nations and, as a consequence, transformed their country for the better. Yet their leaders no longer accept the world as it is. Once deft, subtle, and patient, Chinese diplomacy has, especially since the end of 2009, become shrill and hostile. And Beijing has increasingly set itself against America — as well as its generals and admirals. We are now hearing war talk in the Chinese capital from civilians, such as new leader Xi Jinping, and flag officers alike. Unfortunately for Chinese policymakers, the resulting controversies are occurring in conjunction with others, both internal and external. As Fitch suggested last week, more geopolitical risk is the one factor, during this period of economic fragility, that could push the Chinese economy over the edge.”

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.


About the Author(s)
Sloane Ortel

Sloane Ortel publishes The Sloane Zone, an email newsletter that comes when you least expect it and makes more sense than it should. She joined CFA Institute's staff as a sophomore at Fordham University, and was instrumental to the global growth of Enterprising Investor as a collaborator, curator, and commentator over the subsequent eight years.

2 thoughts on “Is China Coming Off the Rails? (Podcast)”

  1. Gudea says:

    Will – podcast well done. Looking forward to many in the future.

  2. Druce Vertes says:

    Picture I have is … credit and business cycle slows … provinces, state-owned enterprises, anyone whose business needs credit pressures banks for more loans… banks try to stuff all their bad loans into ‘wealth-management products’ so retail investors are the ones stuck holding the bag when they go bad… government cracks down…which stresses the banks.

    When an economy slows, there are a lot of accelerator effects, inventory and investment growth doesn’t slow, it reverses… that’s why we have recessions. Very hard to just slow from 10% to 6% without overshooting.

    Hard to buy stocks… for instance, the big banks (which are about as legit as you can get, never mind the shenanigans in smaller companies, Sino-Forest etc.)… The numbers are fictitious, the government owns 70%, any number of shares give you no ability to influence management or effect change.

    So what are you buying? Maybe, one fine day, a real stock reflecting real ownership in a growth market. And today, a 5.7% dividend. Absurd when you think about it, in a growth market they have an increasing capital requirement and should be reinvesting, not paying big dividends. And you’re buying the idea it would cost the Chinese government too much face to cut a dividend or dilute shareholders, even when the s*** inevitably hits the fan and there’s a bank bailout. Caveat emptor.

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