This has been a year of extremes for everyone but China has been on a particulary gravitation-challenging ride, having gone from falling off a cliff to zooming ahead of the rest of the world. But fundamentals still have a way of nudging their way back onto the stage sooner or later. One of the long-trends we have been following for years has been the rise in debt levels as the Chinese economy gradually slows down after all that mad growth in the go-go years. Remember them?
The China markets have been rattled by a number of defaults — defaults being pretty much unthinkable until very recently. In a normal economy, of course, defaults and bankruptcies sometimes occur, but in China everything is based on the assumption that Those in Command have everything in hand and will bail everyone out if necessary. Local governments, SOEs, property developers, banks and finance companies… But the default spate is apparently starting to impact on that base assumption, and the bond market in particular is trying to figure out how to price in a higher level of uncertainty. It is a reminder that transparency remains China’s biggest problem.
The US election aftermath drags on, which is not good for the global view of the Western model, but we believe we can be confident in that the “coup” attempt is not going to work and Biden will become President on January 20. He was asked a China question at a press conference this week, and said that he will be looking to establish a consensus about getting China to play by international rules. China’s view is that it does, others disagree. But the likelihood is that the standoff is going to be much less fraught and brittle than in the last couple of years. Then again, who knows to what extent such a consensus can be created and how Those in Command would react to it? The signs of potential compromise are few and far between. Henry Kissinger spoke at the Bloomberg Forum this week and said that unless China and the US find some common ground, the prospect of a catastrophe as big as WWI could be on the cards. Good grief. Trenches?
Have a great weekend.