Chu: Bad Debts Rising

Barron's interviews Autonomous’ Charlene Chu in China Banks Guru Warns of Bad Debt Reckoning
Q: It seems like panic about China’s economy has subsided. The Chinese yuan has stabilized and capital outflows have eased. Have the clouds lifted or are we just passing the eye of the storm?

A: No, the clouds have definitely not lifted. There’s some confidence and relief that China didn’t actually fall off a cliff in January and that’s part of the reason for the bounce back in the markets. But all of the economic issues are the same. Supply side and SOE reforms would all be positive drivers, but there’s been little progress on the ground so the talk about reform is more aspirational as opposed to real. China also has a very serious growth problem that’s fueling a massive debt problem. It’s not a foregone conclusion that these problems must mean there has to be a big devaluation of the RMB. The authorities could actually try to deal with these issues head-on through reform, large carve outs of debt from banks and capital injections etc. I think one of the main drivers for the pessimism offshore, particularly towards the currency, is China’s massive debt problem and the fact it keeps getting worse while the authorities do little about it, which is why some people believe a substantial currency adjustment is needed. But if China were to start to address this debt overhang aggressively, then the pressure for a really big currency move would ease up.

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