The Valor Blog.
Investment News and Views, Direct from Our Team.

China is slowing more than many expected

I think the rail cargo chart in the above link is very instructive of where China is heading.

When China sneezes, Australia catches a cold. If China catches a cold, Australia gets Pneumonia.

Unfortunately most “China experts” are still looking at GDP of around 7% and thinking that this is a reasonable number. What they are missing is that the debt to grow at 7% is in the many trillions. China has a debt problem, not a growth problem. So far they are being a little slow in reacting to their ever increasing debt burden. China may not have a Minsky moment, but the higher the debt, the slower the growth. The longer China delays their readjustment, the worse growth will be for the next decade or potentially longer.

As debt continues to grow on a monthly basis at around the entire economy of Greece, China is not rebalancing like the media like to make out. (It is fascinating how much media attention is given to Greece’s debt but virtually nothing on China’s debt.) Until debt is growing sustainably below GDP growth, then China continues to become more risky for themselves and particularly for Australia.

In other words, the longer this goes on, the worse it gets. 7% growth with extraordinary debt growth is very bad for China and Australia.

Unfortunately for Australia, we are also heading in the wrong direction with out debt to GDP levels. Our housing debt is growing at between double to triple our GDP and wages growth. This is unsustainable.

For those that want a basic lesson in credit and economic growth I think now is a very appropriate time to watch Ray Dalio’s “How the economy works in 30 Minutes”. Australia and China are much closer to the top of their credit cycles than many can comprehend. As Warren Buffett says:

“Credit is like oxygen, you don’t notice it 99% of the time, but when it is absent, it is the only thing you notice”.