Are bailout hopes fu­elling a Chi­nese debt bub­ble?

China Daily (Hong Kong) - - BUSINESS - By AN­DREW MOODY an­drew­moody@ chi­

Zhu Ning, ocean­wide pro­fes­sor of fi­nance at Ts­inghua Univer­sity in Bei­jing, be­lieves peo­ple are pre­pared to take in­vest­ment risks in China be­cause they sense the Chi­nese gov­ern­ment will al­ways bail them out.

The lead­ing aca­demic ar­gues such be­hav­ior is fu­el­ing a debt bub­ble which could put at risk the sta­bil­ity of the econ­omy.

“We have had a few high-pro­file de­faults in the bond mar­ket this year in which the gov­ern­ment has in­ter­vened,” he said.

“It some­times cre­ates sit­u­a­tions where peo­ple jump into these bonds af­ter they have heard the news of a de­fault. The price has dived and they will buy them be­cause they know they will be bailed out.”

Zhu spent the sum­mer in the US pro­mot­ing his new book, China’s Guar­an­teedBub­ble, at the Brook­ings In­sti­tu­tion, the IMF and the World Bank.

The Chi­nese ver­sion has sold 35,000 copies so far, mak­ing it one of the top 50 best-sell­ing eco­nom­ics books in China.

“The book is get­ting quite a lot of in­ter­est and at­ten­tion. I’m of­ten sur­prised about how lit­tle China is be­ing un­der­stood, even some­times among peo­ple who are sup­posed to be ex­perts.” Gov­ern­ment guar­an­tee is not unique to China but the way it works in prac­tice is, he said.

He ar­gues that no other gov­ern­ment in the world has the same fire­power to sort out fi­nan­cial messes as they arise. China’s for­eign ex­change re­serves have in­creased from $200 bil­lion yuan ($29.4 bil­lion) in 2001 to $4.5 tril- lion in 2013.

“I think what is spe­cial about China is that the gov­ern­ment has far more re­sources than other gov­ern­ments in­ter­na­tion­ally be­cause of this very vi­brant eco­nomic growth that has built up these re­serves.”

Zhu, who is also deputy dean of the Shang­hai Ad­vanced In­sti­tute of Fi­nance, a lead­ing think tank, said one of the big risks to the econ­omy at present is the prop­erty mar­ket, where prices have soared by 30 per­cent in tier one cities like Bei­jing and Shang­hai this year.

“I have met peo­ple who claim con­cepts such as rental yield (which are at his­toric lows in China be­cause of high prop­erty prices) do not ap­ply in China be­cause ev­ery­one in the coun­try is try­ing to move and live in the big cities,” he said.

“I think the scari­est mo­ment of a bub­ble is when ev­ery­one be­lieves there is no bub­ble.”

Zhu said what is of par­tic­u­lar con­cern is the alarm­ing, rapid rise in China’s debt from 160 per­cent in 2005 to 247 per­cent in 2015, ac­cord­ing to Bloomberg In­tel­li­gence.

He in­sisted it was al­ways the speed of the debt rise that caused crashes such as the South Sea Bub­ble in the UK in the 18th Cen­tury and Ja­pan’s in the 1990s.

“Many economies, es­pe­cially de­vel­op­ing ones, hit a cri­sis point when their debt-to-GDP ra­tio gets to only 70 or 80 per­cent but they have this pat­tern of fast ac­cel­er­a­tion in­stead.”

Zhu does not ac­cept that China is pro­tected from a debt cri­sis be­cause its debt is owed in­ter­nally rather than ex­ter­nally, which was the case with the Asian coun­tries caught up in the fi­nan­cial cri­sis in the late 1990s.

But he re­it­er­ates the Chi­nese gov­ern­ment has the abil­ity to avert any fi­nan­cial melt­down. “I think we’re at a cross­roads where we can still avert a cri­sis.”


The Chi­nese ver­sion is one of the top 50 best-sell­ing eco­nom­ics books in China.


Zhu Ning, pro­fes­sor of fi­nance at Ts­inghua Univer­sity

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