China Crushed By Debt

source: zerohedge

Subsequently, when liquidity injections has been limited, then immediate drops in share prices has begun.


Chinese policy after the financial crisis of 2008 led to the return of economic growth. However, with the passage of time increasing debt became a significant problem for the second largest economy in the world. Weakness of the Middle Kingdom is already affecting related countries. This can be seen, among others, in the number of companies that in 2018 announced earnings worse than expected (top chart), as well as anticipated changes in 2019 profitability (bottom chart - value below zero means that company earnings are expected to decline).

As it can be seen in the second chart, in case of half of the countries, companies' profits are expected to fall or not exceed real inflation. Remember that we are talking about earnings expectations for this year (they will probably gradually reduced).

In our opinion, it is very positive that China is trying to support the economy by lowering taxes and generally facilitating economic activity. In 2019, plans include VAT cuts for the production, transport and construction sectors amounting to 298 billion dollars.

On the other hand, China has been following U.S. footsteps for a long time and they are trying to artificially sustain good economic environment and keep shares and bond prices. This means that they are trying to influence the economic and market cycles, which should not be disturbed. As a result, debt in China has enormously grown and we are concerned that over time China may not be able to deal with it, which will result in an extreme downturn. Such a situation will strongly affect the whole world because China share in global GDP is significant.

Probably when this happens, Chinese authorities even more likely will manipulate data and in official communications inform that economic data is good, although in reality, Chinese economy will shrink. The authorities will be able to take such a step because in China the recognition of the ruling party cannot be undermined. Therefore, the rulers will not admit that they failed during the implementation of a long-term vision of state development.

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Gary Anderson 10 months ago Contributor's comment

Debt to purchasing power parity GDP is far lower. This analysis may prove to be flawed, just like Trump thinking he can win a tariff war is flawed.