China Slowly Strangles Growth

Reuters: Road to stagnation? China Inc gets a break from lenders
Profits at roughly a quarter of Chinese companies in a Reuters analysis were too low in the first half of this year to cover their debt servicing obligations, as earnings languish and loan burdens increase.

Corporate China sits on $18 trillion in debt, equivalent to about 169 percent of China's GDP, but few firms reported feeling the heat.

Instead, lenders are heeding Beijing's call to support the real economy and so are rolling over company debt or granting repayment waivers, sometimes for years, specialist lawyers and investors said.

This is evidence that China may be in for a long period of Japan-like stagnation rather than a single event triggering a crisis - what some economists call a "Lehman moment" after the collapse of Lehman Brothers in 2008, which touched off the global financial crisis.

"They are kicking the can down the road for stability in the short term," said Roland Mieth, Singapore-based emerging markets portfolio manager for U.S. fund manager PIMCO. "China can maintain status quo for many years to come, like Japan did with their leverage, without triggering a financial crisis."
A crisis doesn't go away, it is pushed out into the future because eventually firms have to adjust. Growth is no longer fast enough to shrink the zombies out of existence. In the meantime, GDP growth and potential GDP are downshifted every year. If you're unlucky like Japan, you end up 20 years later with exactly the same nominal GDP. If you get lucky, the economy is larger and you can claim success because the future where economic growth was 2 or 3 times larger doesn't exist. If kicking the can was a good solution, equities wouldn't be trading at the same level as 10 years ago.

No comments:

Post a Comment