Advised and led by their US trained finance types, China has followed the same hide-your-debts-playbook that brought down Enron, Worldcom and global financial markets in 2001-03, as well as Bear Stearns, Lehman and global markets again in 2007-09. The difference this time is the unprecedented scope and scale: China is a whole country, the world’s largest population and the second largest economy. The main benefactor of credit-fueled cash flows from the west over the past 15 years, China forgot that credit expansion is a finite cycle and spent like a drunken sailor throughout. Now it’s left holding a leverage on leverage bomb of unprecedented proportions, with sketchy debts oozing out of every crack and crevice.
We should expect that the liquidity and solvency problems there will be felt though highly connected world markets. This is a necessary part of the great cleanse and reset so needed to reboot asset prices and the economy. So, long-run positive, but short to medium term dangerous for capital.
Kyle Bass, Hayman Capital Management’s chief investment officer and managing partner, discusses China’s economy and the global risks to financial markets. Here is a direct video link.
A footnote here: Mark Mobius has run long-always Emerging Market mutual funds for Templeton Funds for years, he is always buying and always bullish, no matter what returns and risks are likely to be.