Bill Gross: China’s Fading Economic Miracle Is Biggest Worry
Forget the Brexit.Bill Gross, the co-founder of Pacific Investment Management Co. who now runs the $1.2 billion Janus Global Unconstrained Bond Fund, said China is the most important country to monitor in the next year.
“We have to watch China the most,” he told CNBC. “Its leverage has doubled in recent years. It is at 250 percent of GDP where most of the developed world is, but it will be 300 percent before they can spit, and if they cannot keep their supposed economic miracle going at 6 percent of growth then the rest of the world has problems.”
China is treading a fine line between supporting its national currency to prevent capital flight and keeping the renminbi cheap enough to make its exporters competitive with southeast Asian countries that have lower wages.
Chinese Debt Called “Fatal” By Chinese Think TankChina’s attempts to keep its economic engine revving at high speed, with the country’s total private and public debt now ballooning to a 249% debt to GDP ratio, could be “fatal,” a Chinese economist told reporters. Not only is debt growing, but the addiction to cheap money is hard to break.
Leading Chinese economist calls debt addiction “fatal”China’s borrowing to end 2015 touched new highs at 168.48 trillion yuan, or $25.6 trillion, Li Yang, a senior researcher with the leading government think-tank the China Academy of Social Sciences (CASS) wasquoted as saying. The exact debt in China has not been universally agreed upon. The total debt – which includes government, corporate and household borrowing – was less than some non-government estimates and underneath the US, which was reported at 331% debt to GDP.
While debt can build growth in the near term, such stimulative measures are not likely to result in sustainable economic growth but more like a sugar high. The problem with sugar highs is the result in crashes.
“The gravity of China’s non-financial corporate debt is that if problems occur with it, China’s financial system will have problems immediately,” Li was quoted as saying in the Guardian.
Local governments have been going on a significant debt spree, and this is creating “systemic risks” to the economy. Chinese banks, closely linked to the government, could lead to a seismic default and require an intervention.
“It’s a fatal issue in China. Because of such a link, it is probably more urgent for China than other countries to resolve the debt problem,” Li said.