China’s economy is not performing well. The country has experienced an incredible run of growth, but growth of late has been anaemic. Amid rate cuts by the People’s Bank of China, growth forecasts are being downgraded to below 5% by some US banks.
China has demonstrated an astonishing ability to avoid financial crises. Their banks produce vast numbers of bad loans, but the country has never had a major debt crisis. When your economy is expanding by hundreds of billions of dollars a year, old loans start to look small. Essentially, new growth was saving China from its old mistakes.
I can’t recall the exact number of times I have heard dire warnings on Chinese banks and regional governments—all while China continued to march towards the mantle of the world’s largest economy—except to say it’s a lot.
But now, a debt crisis is brewing in a time of lower growth. China’s property market began to wobble in 2020. You may have read headlines about the collapsed developer Evergrande in 2021. That seemed to all go away. But it was only pushed below the surface. Now bad debts are popping up in China’s trusts. The sums involved remain modest, not systemic. But of course, transparency is not China’s strong suit. The problems we can see are perhaps only a fraction of those that exist.
“We believe risks could increase, potentially affecting more financial-sector entities, if China’s economic recovery continues to lose momentum and the property sector’s distress is sustained,” wrote Fitch Ratings in a note to clients in August.
The China pessimists and doomsayers have had an extraordinarily bad four-decade run. Their ranks are greatly diminished. Perhaps it is now, when everyone believes China is truly immune from debt crises, that their luck runs out? Only time will tell.
For now, China bears who want to put their money where their mouth is can bet against the Aussie dollar. Because absent a growing Chinese economy, Australia’s growth is sure to look a lot weaker. If China’s growth miracle blows up, a lower dollar will be the least of our problems.
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