Revisiting Chinese Debt Bubble
As capital markets become more entangled in the global web, China has seemed to stay on the sidelines in allowing its debt to affect the world market. Debt in China continues to rise compared to its growth in GDP. Currently, Debt to GDP stands close to 250%, which is a considerable rise from 150% in 2008 (IMF, PBOC). This increase in debt is largely dictated by the communist party's objective to stimulate economic growth with massive infrastructure policy (Kushlis). Prior indications point to continued infrastructure building even beyond the current slowdown because of the party’s belief in continual urbanization across China. Outside of the push to continue to have expansive growth in China its citizens are the best savers in the world with a savings rate hovering close to 51.6 percent (Chaturvedi).
While China has frugal minded citizens its financial sector does not exhibit the same conservative tendencies. The Chinese banking sector outside of its major banks has seen elevated delinquencies and bankruptcies in loans. These are emerging in what are so-called tier 2 and tier 3 cities in China (Kushlis). In perspective, this is equivalent to cities like Las Vegas, Orlando, and Phoenix in the United States. State run banks continue to only accommodate certain industries while restricting others (Kushlis). It is inevitable to see cracks within the Chinese financial structure but it is likely government officials will continue to avert disaster with ongoing stimulants for the Chinese economy.
Yellen Talks to Congress about the Economy
In the waning weeks of the 114th session of Congress, Janet Yellen met in front of joint committees of Congress to talk about the US economy. Mrs. Yellen opened her testimony giving indications of a rate hike in the near future. She stressed the importance of the underlying macro fundamentals like housing formation, labor and inflation in her opening remarks. Another key point of interest was that monetary policy should be “moderately accommodative” to macroeconomic trends. Mrs. Yellen is still keen on raising interest rates to the intended 2 percent target in due time. The Federal Open Market Committee (FOMC) is aware of the problems with keeping interest rates lower than .5 percent, and their intent is not to encourage “aggressive” market activity.
After the conclusion of Mrs. Yellen’s testimony about the American economy members of Congress asked questions ranging from differing viewpoints. One of the questions asked from Congress pertained to revising the stated objectives of the Fed. Mrs. Yellen did not seem swayed by this and continued to state the benefits of the objectives laid out by Congress a century ago. Another probing question was on the independence of the Fed. Again, she discussed the benefits for having an independent monetary policy. Although the questions from Congress did not overtly paint Mrs. Yellen into a corner she delivered confident remarks pointing out the US economy is heading in a positive direction.
Compiled by the Camelot Portfolios Investment Committee
Darren Munn, CFA, Chief Investment Officer
Sarah Berndt, Portfolio Manager
Eric Kartman, Research
Drew Steinman, CPA, Trader/Research
Frank Echelmeyer, MBA, CKA®, Advisor Consultant
-for Broker/Dealer and RIA use only-
Chaturvedi, Neelabh. Just how much does China save vs the rest of world? October 2015. 2016.
IMF, PBOC. Rise in China's Debt. March 2016. 2016.
Kushlis, Chris. "China's Rising Debt." Price Point October 2016: 1-6.
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