China not cradle for crisis
In a recent talk with Business Insider founder Henry Blodget, billionaire commodity guru Jim Rogers said the tremendous debt buildup and unreasonably high asset valuations have made the global economy even more vulnerable than it was in 2008, and that the next crash will be “the biggest in his lifetime”. “China could easily end up being the cradle where the next crisis is nurtured, thanks to the explosive debt growth seen in the world’s second-largest economy since the (global financial) crisis,” Rogers said, citing Goldman Sachs estimate last year that China’s real debt is 250 percent of its GDP.
Putting aside the inaccuracy of Goldman Sachs’ estimate, China has distinct differences from the United States in terms of its debt composition. The majority of China’s debts have been used for infrastructure construction and technological improvements for domestic enterprises’ transformation and upgrading, meaning its accumulated debts are mostly recyclable, reusable high-grade assets. The debts in the US, on the other hand, have been accumulated to fill up spending gaps, not expand production.
Rodgers may want to warn people of the high debt ratio in China. However, his increased holding of Chinese stocks since last year seems to belie his words of warning.
His negative outlook on China can be interpreted as his “methodology of investment”. While warning of China’s debt level, he did not forget to tell people to buy Chinese stocks and bonds given that its current assets prices are not high. There are reasons to believe that once Chinese stocks and other currency assets become a hot investment target, Rodgers will then short sell them.
However, China must face up to extensive malpractices in its financial sector and try to correct them before they become too intractable to deal with. It must take effective measures to address financial risks and tighten its supervision over the sprawling financial sector. In so doing, there is no possibility of China becoming the fuse for a global financial crisis as Rodgers forecast.
— BEIJING YOUTH DAILY