China’s debt is now alarming

China is now a real concern for investors. Its exports contracted sharply in February, falling 20% from a year earlier, which represents a 6% contraction the previous month. China’s economy is now showing its slowest rate of growth in 25 years.

The concern over China’s slowing growth has caused volatile trading in international stocks, commodities and currencies in recent months. But it is China’s debts which must now be of particular concern. At the end of 2015 China’s total debt reached about 240% of GDP. Private debt was 200% of GDP which is close to Japan’s debt, in 1991 when the ongoing recession started in that country. The question is when and how will China reduce its massive debt?

The process of deleveraging will be both painful and damaging, not only in China but for the rest of the world. Most of this massive Chinese debt has accumulated since 2008,… Continue reading

Lack of control by the Central banks?

Actions by central banks were effective in reducing the fallout from the GFC. Now central banks are so concerned at the problem of deflation that they have continued to lower interest rates and/or continue quantitative easing in an effort to stimulate their economies. As a result we now have inflated asset values in a very low interest rate environment with increasing sovereign debt. Central banks now have few remaining options but to continue quantitative easing or further decrease the interest rate.

Fed chief Janet Yellen took a huge risk in raising US rates in December. It now seems that further Fed rate rises this year are unlikely to occur because of the damage this will cause to the global economy at a time when the United States economy also continues to weaken. Further rate hikes in the US would depress equity markets and it seems more likely that the FED… Continue reading

The bull market and the Shanghai Composite.

Market mood is very bullish at the moment. But bull markets are all about growth. World growth continues to slow and the IMF has now issued yet another downgrade to future world growth. Asset values have been appreciating as a consequence of continued quantitative easing but in the absence of growth, equities appear to be overvalued? So can a bull market continue?

The Australian economy is very dependent on China. The Chinese stock market is less correlated with their national economy than markets of Western nations but it nevertheless provides some real insights into the health of the Chinese economy. The daily chart of the Shanghai Composite below should be of interest to investors. S Comp October

The chart shows two symmetrical triangles which are patterns of uncertainty. The market fell heavily out of the first larger triangle and given the current uncertainties with the Chinese economy this is likely to be… Continue reading

World markets are likely to fall but China is the key.

Although the decision of the Fed not to raise interest rates has at least temporarily removed a variable from the markets, volatility in world equity markets can be expected to continue. Of the several remaining very significant unknowns which contribute to this volatility the most important one is China.

China has recently had four interest rate cuts and reduced the reserve-ratio requirement. These measures and others which in effect reduce financing costs for local government authorities, have created conditions that exacerbate the debt situation and potentially increase the risks of instability in the Chinese financial system.

Easy money conditions were a major contributor to the Chinese stock market boom and as a result retail investors are now the biggest contributors to the national debt. The Chinese debt is now about US$25 trillion and is estimated to be close to 250% of GDP. In fact the rate of growth of debt… Continue reading

What to make of China?

Data coming out of China have always been hard to interpret and from an economic viewpoint have little veracity.  For Australian investors there is little doubt that China is the big story and that the Greek issue by contrast is just a diversion. The Chinese equities market has now fallen 30% over a three week period. This market was a bubble, so a market crash was hardly a surprise.

The question now is how far can the Chinese market fall and what are its implications for Australia?  The stock market in China is different to western markets in many respects. The Chinese market has a very high level of retail investors/speculators with only about 17% institutional investors. These figures are very different compared to western economies. These factors along with the known Chinese proclivity for gambling, means that the stock market becomes one huge casino and with margin… Continue reading

The Shanghai Composite is at an interesting stage.

With the growth of the Australian economy so strongly correlated with the Chinese economy, any changes in China need to be watched carefully.  There are a number of concerns with the Chinese economy.

China avoided the depths of the GFC with huge infrastructure programs financed using credit.  As a result, from 2008 China’s public and private debt has expanded to reach more than 200% of GDP. With continued development the debt is increasing and its rapid growth is outpacing both China’s economic growth and its increase in tax revenue.

China now needs to increase domestic consumption and increase its taxation base but investment has continued to grow rapidly while domestic consumption as a percentage of GDP continues to fall.  In the light of these issues, the flow of cash into real estate speculation as well as social inequality emerge as big problems, so clearly China needs to… Continue reading

Potential black swans for 2014

Quantitative easing is expected to continue to stimulate strong equity markets during 2014.  Equities entail increased risk, part of which is related to unknown factors which are external to the company.  Investors should be aware of these unknowns or black swan events which could trigger a market correction during 2014.   The following five potential black swans are considered to be most important:

  • A banking crisis in the European Union.
  • Economic issues in China.
  • Potential Asian conflict (China, Japan or North Korea)
  • Further escalation of conflict in the Middle East.
  • The Japanese experiment.

A banking crisis in the European Union is possible and this is a major risk. The European sovereign debt problem has not been solved and heavily indebted and leveraged countries are only able to borrow at reasonable rates because of ECB guarantees.   It is a question whether the ECB can continue to… Continue reading

Reflections on the world economy

We are witnessing a world asset bubble stimulated by very low interest rates and continued quantitative easing by central banks.  The United States economy is critical to world economic growth but despite a surging equities market, its economy is only making weak progress when one considers the huge levels of quantitative easing delivered from its central bank.   New house construction, a driver of the economy is weak and disappointing and despite very low interest rates Americans seem reluctant to apply for mortgages even though mortgage rates are at historic lows. One assumes that this is mainly due to the demographic problem of… Continue reading

Ultimately it is all about China

The Australian market has been volatile over the past month and has underperformed most other international markets. While there are some significant issues both in the USA and in the European Union, the major reason for our market weakness has been the depreciation of the Australian dollar which means that off shore investors in Australian equities were suffering from both a falling equities market and falling Australian dollar. As a result there has been a wave of selling of Australian equities and repatriation of funds by off shore investors.

But superimposed on the issue of uncertain international markets and the falling Australian dollar is the uncertainly about the Chinese economy. Over the past year I have drawn attention to the continuing fall in the major Chinese stock index, the Shanghai composite. A nation’s major equities index provides a window into the health of that nation’s economy. The Shanghai composite index,… Continue reading

Risks are apparent in China

The Australian economy is now strongly reliant on the Chinese economy, so we should watch it carefully. The chart of the Shanghai Composite index below is not the sort of chart one expects from a dynamic and rapidly growing economy. On the contrary it is the chart of an economy with some significant underlying problems. At its current level the Shanghai Composite is about 65% below its high of 2007. By contrast the indices in the USA are at an all time high and this is an economy with falling GDP and some formidable underlying debt issues. Clearly there some issues we need to understand.
I noted from the latest Economist that China has just received the first downgrade of its sovereign debt since 1999. Fitch cut its rating on China’s local currency debt by one notch. The reason given is that China now has unsustainable levels of debt on… Continue reading

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