Jim Walker – Wealthy Nations (Hong Kong) –
If there is confusion about any country these days, it is China. The bulls have turned negative and the bears, like us, are turning more constructive. You might ask: Why have we turned positive when we know that China has countless problems?
Much of it has to do with the fact that real interest rates are much more appropriate these days. It is also the case that we see the government in China recognising that it has problems (so much better than the Greenspan/Bernanke mantra that problems/bubbles could not be seen before they happened). We got our feet on the ground in October to get a better picture of how the country was handling its financial sector, SOE and property sector problems.
Sufficient Wealth Buffers
The problem China critics face is that much like Winter in HBO’s Game of Thrones, it is always coming, never arriving. Because of China’s high savings rate and level of growth, the country can tolerate poor returns on investment, for example many of those made in its industrial sector by SOEs and other state-sponsored actors, both in terms of magnitude and duration. Doing so comes at the expense of China’s accumulated wealth, but the government is willing to sacrifice that wealth to provide a buffer for income shortfalls and to maintain stability.
Credit – Less Bang for the Yuan
There is no doubt that China’s economy is addicted to credit. Since 2009, China is getting far less bang for each dollar of new credit, both in nominal and real terms. Much of the “new” credit issued since – and this is an advantage China has over say, the US – has been used to roll over old loans rather than finance new investment.