The China Conundrum: Standard Chartered's Stephen Green

Is China's growth story the superbubble of the century? Not according to Standard Chartered economist Stephen Green, with whom Benzinga Radio discussed China's municipal debt problem and the sustainability of the country's explosive growth. Green gave us a fascinating perspective based on the research his team has gathered directly from the Middle Kingdom itself. Partial summary below.

Green's report is titled "China: Solving the local Government debt problem." Key findings of the report:

-Government debt is about 70% GDP and that compares to about 20% officially. So it's a big number.
-We are seeing reports that a number of local governments are not able to pay back loans. Most of this debt is with the commercial banks.
-This will cause local difficulties. However, the report argues that central government tax revenues are strong enough for the debt to be transferred to its bailout sheet in what essentially amounts to a bailout.
-Bailouts have been successfully implemented before and the report argues that this strategy will be effective in this instance as well.
-Between 1998 and 2005 the government spent probably an equivalent of 20% GDP recapitalizing their banks and writing off bad loans.

On the time frame for solving the debt issue:

-A big chunk of the debt is due to the banks in the next 12 months so there are repayment pressures.
-600 billion in interest is due.
-It is possible a lot of these loans could be rolled over and these debts could be restructured behind closed doors quietly and I imagine that is going on already.

On the “shadow banking” sector:

-It is large and there are a lot of different ways money moves around the economy: Everything from the pawn shop down the street, which give small business loans to large trust companies and they'll lend around 30% to developers.

-China's central bank wants to move a in a much more familiar way like in the US, where the central bank sets interest rates and the banks would then set their own deposit rates of that specific rate.

Is there a material risk to inflation targets at this point?

-Inflation risk is clearly a problem
-Official CPR and CPI are not accurate, there is more inflation than meets the eye
-What's distinctive about China's inflation is that it's driven mostly by food and services
-The government has historically done a great job in investing in manufacturing capacity and infrastructure
-Inflation will remain at single digits

On areas of future research and the next report:

-The Ministry of Railways, which consists 5% of GDP debt

On claims by CitiGroup that the Chinese government is intentionally slowing GDP growth:

-China will grow 8 to 9% in the years to come
-Wages are up 10 to 15% every year
-People are moving from expensive coastal areas to inland regions, which should act to develop China's mainland
-GDP growth slowdown is not a problem for China because unemployment is low and wages are rising

View from China on the debt ceiling debate:

-“I think most in the central government understand that at the end of the day, both political parties in the US need to take this thing right up to the last minute for political reasons. They can't be seen to be caving in early on. And so I think folks realize that this thing will be solved at the end of the day and we're not worrying about a default.”

-Chinese government “looking askance” at how disfunctional US politics have become

On a third round of QE in the United States:

-Motive for QE is seen as currency devaluation
-China needs US growth as well as its own, so it will likely turn a blind eye if QE3 is needed

Posted in: Benzinga Podcast, China, Stephen Green


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