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

George Magnus and China collapse analysis

George Magnus is a very well respected man and deservedly so. Unfortunately he has fallen for the same trap as most other economists and China economic watchers. He has ignored the debt levels growing at significantly faster rates than GDP.

China could grow GDP at 15% a year, but if they are growing debt at 50% a year to achieve this, then they are increasing the probability for a crisis by the month.

China has been growing debt at a rate of around 4 to 5 times GDP for a number of years. The longer they do this, the worse the outcome. These are the official figures which don’t include a likely overstated GDP number and bad loan provisions of 1% which are probably many multiples higher than this.

There is no rebalancing in China unless they manage to reduce debt growth to closer to GDP or below GDP growth. The longer they destroy capital by borrowing more than they create, the worse the eventual pain.

Propping up bubble stock markets is a waste of money and continues their capital destruction. Anyone who buys a dollar for two dollars will have difficulty over time.

Debt is the reason why this China slowdown has only just begun. Baton down the hatches if you own assets based on an unsustainable Chinese miracle. The majority of Australia is highly exposed to a slowdown in China, however for some reason, Australians seem unfazed by the events. Good times for 24 years breeds complacency.