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No Crisis for China

December 7, 2017 | Global/Emerging Markets


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A key concern about China is its financial system—specifically, the rapid accumulation of leverage necessary to power ever-smaller increases in growth, which could lead to a financial crisis. We do not anticipate such a crisis, but are carefully monitoring several trends in the country, including China's rapid liberalization of its financial sector.

Over the last several years, we've seen a notable change in the offering and use of credit in China. It is no longer just banks that are providing credit, and it is no longer just companies and households that are accepting credit. In the second half of 2014, for example, we saw rapid growth in credit from governments and nonbank financial institutions, which tends not to go into economic activities.

We believe the pace of liberalization should be measured, because history is filled with stories of economic crises brought on by too-rapid liberalization.

This is part and parcel of developing the country's financial system, but we believe the pace of liberalization should be measured, because history is filled with stories of economic crises brought on by too-rapid liberalization. Such liberalization requires a new kind of regulatory oversight to monitor all of the new agents playing an active role in the delivery of financial services.

Fortunately, since the second half of 2016, the Chinese government has caught on and has moved to clamp down on this type of credit growth. Credit numbers are now much more in line with what economists believe they should be.

As a frame of reference, we tend to think of credit growth as sustainable if, on a monthly flow basis, it doesn’t meaningfully exceed nominal gross domestic product (GDP) growth. And current credit growth is roughly 15% with current nominal GDP growth between 10% and 12%.