Will China’s Economy Collapse?

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Investors have recently focused on some of the problems potentially facing the Chinese economy, and they’re getting worried. The concerns are that China might be facing a destabilizing property price bubble and rising bad loans at its banks due to last year’s recession-busting credit boom. I’ve offered a word of caution myself.

The message from Jing Ulrich, chairman of China equities and commodities at JPMorgan, however, is: China won’t collapse.

In a note to investors, Ulrich tried to debunk concerns about a possible China crisis. Here’s what she said:

The worst-case fears concerning China’s property market are based upon a layer of truth and we ourselves have highlighted the untenable nature of price increases in some big Chinese cities…However, there are crucial differences between China’s real estate markets and those of the U.S. (and indeed Dubai), which require that we view the apparent building bubble through the lens of China’s unique circumstances.

The Chinese housing market is less risky than that of the U.S., she contends, since Chinese tend to have less debt and more savings than their American counterparts. Nor does the financial sector suffer with the type of subprime excesses witnessed in the U.S. Ulrich continues:

We share many of the concerns about flawed incentives and overheating in the Chinese property market – but even if property prices were to undergo a correction, this would not trigger the type of economic and financial devastation that might arise in an over-leveraged economy.

She is also not so concerned about the potential problem of large debts at China’s local governments, which have been built up by investments in infrastructure projects.

Chinese bank loans for public sector investment projects carry implicit or explicit sovereign guarantees, and are thus almost akin to a bond issuance for a public works project… Looking ahead, while certain local administrations might struggle to service debt, the magnitude of public sector debt risks do not appear as severe as some have suggested.

She concludes:

While we agree that certain vulnerable areas of the economy deserve closer monitoring, we find little support for the skeptics’ views of an imminent crisis.

I agree that China is unlikely to face some kind of monstrous meltdown anytime soon. At the same time, I find the whole argument that China is “different” than other countries a bit hard to swallow. The mathematics of economics is the same in every part of the world. If Chinese are investing in property based on the idea that prices will continue to surge, and they don’t, many might find themselves underwater. If local governments struggle to pay their debts, someone else has to, and the solution could be akin to a bank bailout by the central government. Perhaps such developments (if they ever happen) won’t spark a major crisis, but they do have a cost, and they could dampen investor sentiment, both at home and abroad, and that’s not good for the Chinese economy.

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