Time To Question The Middle Kingdom?...

I have been an admirer of China’s growth for a long time. The doomsayers predict it will come to an end and maybe soon, but with a nearly forty-year track record of solid results, I will stick with China until they stumble. Call me stupid.

However, today there may be reasons for me to second guess myself. GDP growth was 10% to 15% throughout much of the ‘80s and ‘90s. It has now slowed to 6% to 7%, or at least this is what the Government says. For thirteen consecutive quarters now reported growth has been between 6.7% and 6.8%. For an enormous economy like China with over a billion people, are these steady growth numbers - down to a tenth of a percent - believable? Maybe, but you have to wonder. Some pundits think the actual growth rate is 3% to 5%.

The Government has made a bargain with the Chinese people: We will provide economic growth so that you can buy all the cars, apartments and food you can afford. Your end of the bargain is, don’t make any noise about the ruling Communist Party.

At 10% to 12% growth the Government can easily meet its side of the bargain. At 6%, or possibly 3%, the bargain gets more difficult. So maybe China has been buying time by fudging the GDP figures. It certainly has been borrowing money to try to keep the growth rate up (see chart at the bottom). Corporate debt has been growing especially fast. How good are these corporate bonds? Chinese bonds are rated by Chinese rating agencies, not by established names like Moody’s and Standard & Poor’s. In the United States there are only two corporations left rated AAA (Microsoft and Johnson & Johnson). More than half of all U.S. companies are rated junk, meaning BB+ or below. In China 93% of all corporate debt is rated AAA or AA. Now maybe Chinese corporations are incredibly safe but remember Standard & Poor’s rates China itself at only A+, five notches below the top. So how can 93% of Chinese corporations be more secure than the ‘parent’? This is a little like Lake Wobegone where “all the children are above average.” If China’s growth rate is suspiciously too consistent and if Chinese corporations are rated so out of whack with the rest of the world, does the China story need a rewrite?

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