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China Outlook: Standard Chartered's Stephen Green On Benzinga Radio


Benzinga radio recently had the opportunity to speak with Standard Chartered's Stephen Green, who heads up the bank's research in greater China. Mr. Green is based in Shanghai and holds a PhD. from the London School of Economics and a first class Honours degree from Cambridge University. He provided Benzinga with a unique perspective on growth and debt in the People's Republic of China, based on his team's on-the-ground research. Mr. Green recently released a report titled "China: Solving The Local Government Debt Problem." The paper reveals that debt is equal to around 70% of GDP versus the 20% that is officially reported in the country and that Chinese municipal debt is estimated at $1.5 to $2.1 trillion. Most of this debt is held by commercial banks and a number of local governments are not able to pay back the loans.

As a result, the concerns are twofold, with worries over the banking sector as well as government finance. According to Green, however, the debt problems at the local level could probably be mitigated if it is transferred to the central government balance sheet given the country's strong growth rate and rising tax revenues. The country has successfully implemented bailouts previously, and this strategy will likely be effective again according to Green. A significant amount of this municipal debt is due in the next 12 months, so there is repayment pressure mounting in the Chinese system, and it is also likely that some of the debts are being restructured quietly behind closed doors.

On the economic front, Green told Benzinga radio that inflation continues to be a headwind for the Chinese economy, but that "in the short term there is a lot more easy growth to come" in China. He said that with inflation, real growth is still 10% and that urbanization levels are still only at 50%. Therefore, there is still more room for citizens to move into the cities, "and hopefully their income will increase as well," which should continue to drive the economy.

Green added that in China, there is more inflation than meets the eye, because of the country's shadow banking industry, which operates outside of the banks. Examples of this would be pawn shops which offer loans and trust companies which lend to developers. He said that he thinks there is "clearly a problem with official CPR and CPI numbers," and that most economists would say those metrics are becoming devalued with regard to measuring the real inflation rate. Inflation in the country is being mostly driven by demand for food and services.

Benzinga also talked with Green about China's outlook on the debt ceiling debate in the United States as well as their likely reaction to more quantitative easing in the United States. He said that he thinks there is some concern emanating from China with regard to the debt ceiling in the United States because of the country's status as the largest owner of U.S. Treasuries. He added, however, that most in the Chinese government understand the political realities in the U.S., where neither party wants to lose face. Therefore, China thinks that a deal will be reached at the last minutes, and they are not worried about a default.

When asked how the Chinese government would view QE3 in the United States, Green said that it would cause them concern. He said that "they believe that one of the motives for QE3 is currency devaluation" and that since "China holds a lot of U.S. debt a weak dollar isn't necessarily what it wants." At the same time, however, China wants the United States to grow, and if QE3 promotes growth, China would have to consider supporting it, or at least turning a blind eye.

Click here to listen to the interview in its entirety.


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Posted-In: China InflationNews Movers & Shakers Politics Global Economics General Best of Benzinga

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