Buenos Aires, Argentina
Last night I was at a party. It was an elegant crowd, gathered in a garden around a pool. But, most significantly, it was a truly international bunch of people. During the evening I met folks from such diverse places as Australia, Ghana, Canada, Romania, the US, the UK, Argentina, Colombia and so on. All friendly…all having a good time…all getting along. You see? It’s not that hard.
Today I’m back to monitoring what’s going on in the world. Earlier in the week, I wrote a summary of some of the bigger risks that I see around (see here). Several readers wrote in with feedback on what I’d missed. One thing cropped up several times: China. Specifically the “Chinese debt bubble”.
It’s certainly true that Chinese debt has taken off in recent years, but it’s not across the board. A relatively small portion of state-owned enterprises (SOEs) have debts that are off the charts. These are essentially zombie companies propped up by the largesse of state-controlled banks. But private Chinese companies don’t tend to go to such extremes (by choice or otherwise).
On the other hand, Chinese government debt seems to be at manageable levels, being around 48% of GDP (although on a rising trend). That’s low by today’s sloppy standards of what’s considered fiscal rectitude.
Set against that, China has over $3 trillion of foreign exchange reserves. That’s equivalent to 25% of GDP. So, on the face of it, it looks like the Chinese government has plenty of firepower to stabilise any kind of future debt crisis.
After all, they’ve bailed out the big banks before. That was in the early 2000s, before the “policy banks” were converted from government bureaucracies into listed corporations. The authorities simply handed over tens of billions of dollars of US treasury bonds to each of the “big 4”. (I have some insight into this, as I ran the due diligence team on a multi-hundred-million dollar pre-IPO investment into one of those banks.)
My first visit to China was in 1998. Back then, Beijing was still a dusty place with mostly empty avenues, uninspiring food and miserable concrete apartment blocks…of the type found in all communist countries. The traffic, such as it was, consisted mainly of buses, bicycles and government limos.
Nowadays, it’s rammed with shiny new cars and glitzy buildings. That’s what happens when you increase a country’s GDP from $1 trillion to $12.3 trillion.
Twelve times in the span of just 20 years. It works out at a compound annual growth rate (CAGR) of 13% a year. That’s nominal, meaning not adjusted for inflation. But, nonetheless, it’s seriously impressive.
I first started properly learning about China in 2001, when my former employer (UBS Group – a big Swiss wealth manager and investment bank) wanted to develop a strategy to expand in the country. I was the person asked to put together the alternatives for the board to ponder. They went full steam ahead on everything (and I got sent to Hong Kong for a few years to make sure it happened).
When I visited the bank’s representative office in Shanghai in late 2001, it was staffed by one relatively junior (and slightly odd) manager and a couple of assistants. They didn’t seem to do much, except perhaps organise occasional visits of senior executives from Europe or the US. They were right on the distant fringes of a huge, global, corporate empire. Nowadays, UBS employs many hundreds of people in mainland China – trading stocks and bonds, raising capital, managing money.
Of course, China isn’t immune to the vicissitudes of finance and economics. But its shift from stodgy communism to rampant capitalism has been handled well by the autocratic government. At least, so far.
Perhaps they’ve got away with it by employing a heavy dose of what you might call “redwash”. Red being the colour of socialism in almost all of the world. (For some reason, the US Republican Party didn’t get the memo.)
If President Xi Jinping’s public pronouncements are to be believed, “socialism with Chinese characteristics” is leading the country towards a Marxist utopia a few decades hence. That’s just soon enough to give people hope (or, at least, the sort of people that hope for such things). Just far away enough that Xi won’t be around when it doesn’t happen.
“Socialism with Chinese characteristics” sure looks like capitalism to me. George Orwell would have recognised this for what it is. This is Chinese “doublethink”. Black is White. War is Peace. Capitalism is Communism.
So I’m always in two minds about capitalist China’s prospects. On the one hand, the risks of a debt-induced crisis are ever present. On the other hand, I’ve heard endless predictions of impending doom ever since I started paying attention, back in 2001. None of them have come to pass.
Last night’s excellent party had to come to an end, as they all do. When will the Chinese economic party end?
How long is a piece of string? No one knows. But if China does eventually implode, it will undoubtedly be doubleplusungood for a lot of people.
Stay tuned OfWealthers,