Global markets have not been recently very kind to investors across all major asset classes. Tumbling oil prices and deflationary pressure in Europe are relatively well researched. However, issues surrounding the China’s debt remain most mysterious leaving us with many question marks. Total China debt (including sovereign, corporate and household borrowings) has soared by 100% of Gross Domestic Product since 2008 and touched recently 250% of GDP. That’s well above any other emerging market level. Could China be heading for a crash?
Economists think the debt problem is unlikely to cause a sudden crisis. One of the reasons is that China controls its banks and can bail them out. The bigger worry is whether China’s establishment does enough to clean up the financial sector.
Studies prove that half of China’s debt is owed by companies. Most of those companies are state owned and property developers. The slowing economy and falling housing prices will result in many of those loans unpayable unless the state officials do something.
The biggest mistake investors can make is to stay asleep hoping the state will cover their losses. However, we should remember that nobody, even China, cannot cover losses for ever.
Source: The Economist
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