Camelot Portfolios Talking Points

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-

 

Bibliography

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.

Disclosure

The materials presented is for use by professional advisors only.  It isintended as informational and educational, and is not intended to be interpreted as investment advice.  The references to specific investment ideas, be they concepts, trends, sectors or even specific securities, are not recommendations for any advisor to adopt for any of their clients.  No investor or client reading these materials should view them as investment advice.  These materials are to be utilized as a catalyst for thought and discussion regarding the economy, investments, and responsible investing in general.  Past performance is not necessarily indicative of future returns, and there is no guarantee that any information presented herein will contribute to a profitable portfolio.  All facts referenced herein are derived from sources believed to be reliable.  A318