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.”

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

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.