Independent Strategy

China’s debt dilemma

Despite China’s National Audit Office (NAO) reporting that the total public debt ratio was still well under 60% of GDP we remain concerned about the credit bubble. The NAO figures exclude several important sectors, obscuring the real level of debt. Also, even on the audit figures alone, the increase in debt is way above China’s nominal GDP growth, especially in loans to the weaker local governments. This leaves the government with a dilemma. It wants to rein in excessive lending, especially the flow going through dubious ‘shadow banking’ conduits to local government. But if it does so, it will be much more difficult to meet its GDP growth targets. Such difficulties should place a lid on equity performance and we are coming out of Chinese equities for now.

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