Is China slowing NOW? Is the big collapse predicted for years by US hedge fund managers actually happening NOW?
The key point is that growth must and will slow from here. Half of China's 7.5% growth today is coming from debt financed investment in property, infrastructure and factories - 3 sectors with huge excess capacity. If Chinese GDP is slowing sharply in 2014, that is positive for china longer term. If Bejing reacts to slower growth with fresh stimulus, the inevitable day of reckoning will be that much worse. Even if they continue to remove stimulus and follow through on critical reforms (interest rates, banks, SOEs, property taxes, just to name a few), the probability of an accident, a bank run, a systemic freeze-up of some kind, in this very large and complex country, is, IMHO, more than 50%.Two stories from the irreplaceable Caixin touching on the one area where china is undertaking dram if reform: the financial system. Specifically, the entry of Alibaba and Tencent, two tech giants that rank as among the best managed companies in china, into the business of accepting consumer d"deposits", on-line and earning interbank interest rates far above what the big ugly stupid SOE banks are permitted to pay (in rough terms 5% versus 1%). These two upstarts have raised in excess of $100 billion dollars in about half a year. The Bejing authorities have said public ally they like what they see. But sucking out all the deposits from the traditional banks will expose their ginormous non-performing loans and force the government to once again bail out the banks. Is Beijing prepared for this? This all bears a vague resemblance to the end of Reg Q in the US in the mid-eighties. Reg Q set a maximum savings account interest rate. The entry of aggressive S&Ls, willing and legally permitted to pay higher rates, sucked deposits from banks and forced the end of Reg Q.Rate liberalization driven by tech, approved by BJ
5 new private (I.e, not state-owned), one each for alibaba and tencent, are I final stages of winning approval.Buyer Beware! China has a big risky macro story but investors cannot lose sight of the fact that there's still a morass of fraudulent companies (became clear to all in the 2011 reverse merger US listed china frauds), and that china still lacks rule of law with regard to corporate theft, and still lacks a transparent and rules based resolution process. Instead, politically well-connected PRC promoters are untouched whilst politically connected PRC creditors often get paid back partly with company assets - while US/offshore investors get nothing. Don't forgot this! China is a large stock market with a small % of investible companies. Most large cap stocks are low quality SOEs, and many small cap are either frauds or low quality bizs. Stocking picking in China remains a minefield, regardless of what happens on macro/reform. This piece from Caixin tells a tale of woe all too common for foreign investors into Chinese stocks.George Soros agrees with me. I've been saying this for a year but Soros' view probably carries more weight! Europe will survive and the periphery will stay in the Euro. The US will continue to show mediocre, disappointing growth - but with de minimus risk of recession. The biggest risk to global risk assets is a step-wise drop in Chinese growth.