I have been arguing for several years that once China begins the adjustment process, which I expect to characterize the ten-year period of the current administration, growth rates must slow significantly. My expectation for long-term growth is that it shouldn’t average much above 3-4% annually. This is what it will take for household consumption to rise to roughly 50% of …
Read More…Category: Balance sheets
Feedback loops
Early this month Martin Wolf had another of his very interesting articles, this time on China, which I think suggests some of the concerns we must have about the upcoming adjustment. Wolf argues that it may be useful to think about Japan as a model for understanding the adjustment process in China since the Japanese model …
Read More…Recognizing the need for economic adjustment
In China, I have argued many times, high growth is no longer compatible with a strengthening balance sheet. If China is growing at a rate that approaches or exceeds five or six percent, it is probably a safe bet that debt is rising faster than debt servicing capacity. The good news is that the current leadership seems very …
Read More…How do we measure debt?
In the last issue of my newsletter much of the first half was dedicated to a discussion of recent events in Spain and Italy and why they reinforce the argument that several countries will be forced to leave the euro and restructure their debt. The most worrying, but expected, fact was the amount of capital …
Read More…The unacceptable behavior of the market
Last night I arrived at my family’s home in Spain just in time to catch Spain play Italy. The whole family and lots of friends watched it, while feeding on great seafood and lots of wine, at a neighboring chiringuito on the beach, and I guess if you weren’t there you can only imagine the excitement. I suppose this spectacular win …
Read More…The World Bank proposes tough medicine for China
Contrary to some recent research reports cited in the press I do not think we have seen any substantial rebalancing of the economy towards consumption in 2011. This is largely an argument being made by economists who did not see why Chinese consumption repression was all along at the heart of the growth model. These …
Read More…Incentives and debt
I want to start this newsletter with a story that may be fairly illustrative of one of the problems within the Chinese economy that I worry about. There was an article in last Sunday’s edition of the South China Morning Post about a real estate project in Guangdong. (WC Fields’ was supposed to have once …
Read More…Trade and the RMB
Most of last week’s newsletter was dedicated to a discussion on Chinese debt, specifically on how we should think about the Chinese debt structure and on when would we know how much debt is too much debt. Every earlier example of the investment-driven growth model that China follows ran into the problem of an unsustainable …
Read More…Looking for debt
Quite a lot of data came in last week as I was recovering from the jet lag generated by last week’s trip to the US, and for good measure, the PBoC then raised minimum reserve requirements Thursday evening. I discuss the numbers extensively in my newsletter, and of course there has been a lot of …
Read More…Do sovereign debt ratios matter?
In the past few weeks I have been getting a lot of questions about serial sovereign defaults and how to predict which countries will or won’t suspend debt payments or otherwise get into trouble. The most common question is whether or not there is a threshold of debt (measured, say, against total GDP) above which …
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