China’s economy is slowing suddenly. Recently, the country also experienced its first domestic bond default. And that was quickly followed by the collapse of a property developer.
This has some folks talking about an impending ‘Bear Stearns moment’ for China.
There are other’s that argue China’s “Minsky moment” has arrived. The phenomenon is named after economist Hyman Minsky who articulated that periods of speculation and credit growth inflate assets, only to end in crisis.
But Bloomberg BRIEF economist Tom Orlik writes that financial doom scenario concerns are ‘overstated’ and makes four arguments to support his case.
- “The problem is smaller than it appears”: China’s credit is expected to be close to 200% of GDP in 2013, this figure is likely inaccurate. And China’s GDP is “probably underestimated by a considerable margin, thanks to hidden service sector output.” Meanwhile, China’s “corporate and household credit is probably overestimated.” Companies on the Shanghai Composite index have debt at 146% of equity in Q4 2013, compared with 233% seen in the U.S. in 2007 right before the financial crisis.
- “Doomsdayers focus on the rapid growth of shadow finance”: China’s ‘genuine’ shadow sector, mainly its trusts with 10.9 trillion yuan (about $1.8 trillion) in assets under management, accounts for 9% of outstanding credit. And it’s here that “regulations are light and capital buffers small.”
- “The government is already taking action to stave off a crisis”: The government also has resources to do this with causing growth to tumble. Borrowing costs for banks have increased since mid-2013, resulting in slower credit growth. The defaults, in this light, seem like actions taken by a government that is willing to stomach some pain now to avoid bigger problems down the road.
- “Almost all of China’s debt is domestic”: Central government debt is low and the nearly $4 trillion in Forex reserves means policymakers can backstop the system if they need to. And because its mostly domestic debt, “China is little troubled by the sentiment of foreign investors.”
China has set a GDP target of 7.5% and economists believe that there’s a growth floor of 7% — the slowest growth that policymakers will tolerate.