Posts tagged ‘panic’
The election of Donald Trump to the US presidency apparently “wiped out more than $1 trillion across global bond markets“, as reported by Reuters earlier in the week. The inflationary nature of his policies has not, after all, gone unnoticed. Bond markets have digested new information and responded rationally, by falling in price so as to offer investors the prospect of higher real returns. Yes, the politics have tinged the reporting – as with the economic consequences of the UK’s decision to leave the EU. But surely the picture is clear: an event has occurred, markets have responded efficiently and their response is cause for concern.
As in the case of Brexit, however, the political element seems to have cost some observers their perspective. Starting with the obvious: only part of that $1trn comes from the US itself. And bond markets have been weakening for some time: Mr Trump’s election only accelerated the process. Referring to the BofA Merrill Lynch US Treasury Index, the full market value of US government bonds climbed to a peak of $9,729bn on the 8th of July, when the ten year bond yield reached a record low of 1.36%. By 8 November, before there was any indication of the surprise election result, this value had already fallen to $9,507bn. As of yesterday, the number was $9,296bn. So most of the fall since the summer preceded the new president entirely.
More broadly the invocation of a “Trump thump” is a symptom of the behavioural concept known as anchoring. We had become very used to both the recent level of bond yields and the pace of their rise before the election, so the sudden change shocked us into thinking that something anomalous had occurred: in this case, a dramatic change in policy direction arising from the victory of a candidate from left field.
This is at best a partially misleading analysis. Inflationary pressure has been mounting – and disinflationary forces have been receding – for some time. Look at the prices of base metals and freight and global activity seems to have been picking up over the second half of this year too. What is strange – perhaps – is that bond yields remained at record lows for such a long time. Putting it unkindly, bond markets have often seemed to care much more about the last ten weeks than the next ten years. There is a case to be made that the so-called “thump” was no more than a catalyst to their ongoing recovery from inertia.
Time for some more context. Yes, the US 30-year yield has risen by its fastest pace since at least 2009, putting on 40bp in four trading sessions starting last Wednesday week. But it has since spent the whole of this week hovering around the 3% mark. The initial spike was unusually volatile, but taking a slightly longer view the 30-year yield has now risen by about 1% in total since its July low – and did exactly the same thing over a similar period in H1 2015.
Look at current pricing in absolute terms and 3% is not even a high number. Trump has only managed to thump the 30-year Treasury yield back up to where it ended last year. It is almost exactly in line with its five-year average. And this is still miles below the 5.3% it posted on the cusp of the credit crunch (21 July 2007).
From another angle, a 3% return for thirty years looks plausible in real terms if we focus on the most recent American CPI data (last in at +1.6%). But long run expectations according to the University of Michigan survey are closer to +3%, and the 21st-century average prior to the Great Recession was +2.8%. On that basis the election result has only delivered US investors a prospective 30-year real return of 0.0-0.2%. In fact if one really wanted to get bearish on bonds one might observe that these levels of inflation would, not so very long ago, have been regarded as unachievably benign in any kind of growth-positive environment for the US economy. That is why the bond market has been able to rally to new highs year, after year, after year since inflation peaked at 15% in 1980.
So from a politically detached perspective, perhaps we should forget about Mr Trump’s impact on the US bond market. Fundamentally speaking he has taken the stage as accomplice, not assassin.
What we oughtn’t to do, of course, is forget about the possible impact of bond markets . . .
At midnight last Thursday, the pound fell by more than 6% against the dollar. Its intraday (intranight?) low was 1.1841. Since then, cable has stabilized somewhat. It currently prices at about 1.22, up from a closing low of 1.2123 reached on Tuesday. So what does the pound’s latest “31-year low” – or even “168-year low” – signify, if anything?
First let us consider the very straightforward economic consequences, which are twofold.
On the positive side, the cost of buying British goods and services from abroad, from JCBs to tour bus tickets, falls. This is growth positive. It is also why currency devaluation is one of the most obvious and best understood forms of monetary easing.
On the negative side, the cost of buying foreign goods and services in Britain, from rice to Ritalin, increases. This is growth negative since it compresses margins for importers and makes consumers poorer. This is also why currency devaluation is a risky and unpredictable means of monetary easing.
One key question for the British economy is: which of these two effects will predominate? That depends purely on the inflationary impact. If this is relatively modest then devaluation will increase growth without hitting people’s pockets, or firms’ margins, too forcefully. If it is significant, however, then the devaluation will depress overall economic activity since domestic demand accounts for a far more substantial part of output than exports (62% versus 30% on Q2 GDP data).
It is hazardous to speculate as to which outcome Britain will face. On the one hand, supranationalist media sources are sure the export benefits will be slight and the inflationary impact severe. On the other, Brexiteering sources seem not to have considered the inflation question at all.
One thing we can do is examine the scale of the pound’s recent fall with some detached perspective.
Cable has fallen by 29% since the high of 1.7166 it reached in early July 2014. Its all-time closing low was posted on 26 February 1985 at 1.0520. However the pound has not yet broken through its December 2008 low against the euro (€1.025) or its more recent (2011) low against the yen. Looking at the Bank of England’s trade weighted index, which pits the pound against a basket of other currencies, this week’s low was barely through the previous record level reached in 2008 (73.3 versus 73.4 back then).
It is understandable that the focus of the media should be on the sterling exchange rate which has moved the most dramatically. However, again with some detachment we ought to observe that cable’s recent history has been affected by dollar strength as well as sterling weakness. The Federal Reserve’s trade weighted dollar index has risen by more than 21% since its 2014 low. Indeed, while the pound has fallen by 29% against the greenback the euro has not been far behind, dropping 21% since its own 2014 high point (from $1.39 to $1.10 today). Without wishing to overdo the point about press coverage one does not see headlines in The Economist about “votes of confidence” in the single currency.
Some sources have taken things further, with Bloomberg claiming that the pound has become an emerging market currency: “the new Mexican peso”. Now at the time of the “tequila crisis” back in 1994 the peso more than halved in value against the dollar in under three months. More recently, the Brazilian real almost halved in value as commodity markets collapsed in 2014-15. Again, a little more perspective would be nice.
This is not to downplay the risks arising from imported inflation. The UK’s next CPI and RPI prints will come out on Tuesday. PPI input prices in particular will merit close attention. Year on year they have already rocketed up from -15% to +8% in the space of 12 months. That inflation has to go somewhere: again, either into shrunken margins or consumer’s pockets (and if it persists, most likely both). Back in 2007, RPI inflation rose at around 4-5% and food prices were making tabloid headlines. Inflation also means higher pensions, higher gilt yields and higher public sector wages, all of which is bad news for Britain’s strained fiscal arithmetic.
Furthermore, Mark Carney today confirmed the Bank of England’s insouciant attitude to inflation at a “public roundtable”, saying that while he appreciated that it could cause problems he was willing to see the Bank miss its target to protect against the supposed loss of jobs into next year. (Readers of this blog will know that the MPC officially abandoned its founding mandate back in August). Markets are less complacent: expectations for a further cut in the base rate have evaporated, and the ten year gilt yield has risen to 1.1% from the record low of 0.52% it established only a couple of months ago.
Now price increases were back in the tabloids again just this week. If imported inflation does cause problems, and the Bank does nothing to stop it, then the ugly devaluation scenario may well end up playing out. Looking at the bigger picture for sterling, and not just the cable rate, we ought not perhaps to panic overmuch. But even at a princely 1.1% the gilt market is not remotely priced either for an uncomfortable patch of price behaviour or the policy normalization required to deal with it. There could be some interesting developments ahead.
At this time last year, markets were preoccupied by the bear case on China. The stock market had collapsed, the yuan was devalued and the country stood supposedly on the brink of a major banking crisis brought on by bad lending and vanishing growth. So appalling were the consequences of such a crisis that the Fed explicitly linked US monetary policy to the wild ride offered by the Shanghai Stock Exchange.
What a difference a year makes! There is the occasional susurration over the Chinese Peril discernible by those who listen intently, but panic on the subject, having waxed to hysteria last summer, has since waned to nothing.
At the same time, Chinese data has continued to be published as before. So what has it been telling us? Are we being complacent to ignore a threat which only twelve months ago was thought to imperil the world? Or was it all nonsense?
A year ago this blog took something of a sceptical stance on the Chinese Peril. On the subject of devaluation in particular we said that “exports matter to the Chinese economy, devaluation ought to help exporters, and monetary softening elsewhere ought to ease some of the pain in the property market and contribute to lending growth.”
Lo and behold, those macroeconomics textbooks turn out not to be a waste of shelf space after all. Trade figures out from China yesterday showed the pace of decline continuing to slow; both export and import numbers exceeded forecasters’ expectations. It is instructive too that the latest bout of renminbi weakness has passed without much comment: the yuan is just under 3% weaker against the dollar for the year to date, almost matching the pace of its decline last year when it made for headline news. (Just as importantly it is also 6% weaker against the euro and 21% weaker against the yen.) So far there is no sign of this translating into higher prices: CPI inflation was +1.3% on the year to August, towards the bottom of its recent range and well below the levels of 5-6% which provoked a policy response in 2010-11.
Further evidence of economic woe last year came from output indexes. It was seen as more surprising than it should have been at the time that a sharp strengthening of the currency had hurt manufacturing. Similarly, when last week’s manufacturing PMI number came out at 50.4 for August – not earth-shattering, but the highest level for two years – it not only beat expectations but fell outside the entire forecast range.
Another area of concern was the property market. Signs of weakness last year were misinterpreted as a dangerous, balance-sheet-threatening bubble collapse. Yet the market has since steadied following its correction and some cities are imposing ownership curbs in an effort to curb precisely the kind of overextension which so many observers thought they had noticed twelve months ago. As to balance sheets, figures out last month showed that the bad loan ratio for the Chinese commercial banking system actually stabilized in the second quarter at 1.75%. (That’s still a large figure in dollar terms – $215bn – but then China has fifteen times that amount in sovereign reserves.)
Looking at some other indicators, retail sales growth has remained steady at levels of +10% on the year and more throughout 2016, and July’s passenger car sales figure (+26.5% on the year) was the highest posted for three and a half years. On the industrial side of things, electricity consumption came in at +8.2% on the year to July, up from -0.2% back in December and the highest print since February 2014; headline industrial production itself seems to have bottomed out last year and has turned out at +6% and better for 2016 so far.
None of this is to say that China does not have her economic issues, like every other country. Here one might think of SOE inefficiency, frustrations to some monetary transmission mechanisms, over-reliance on particular sources of growth, grim demographics and developing world problems such as questionable building standards and the frictional effects of political corruption. But if we are to find the source of the next global catastrophe it seems we must look elsewhere. The Chinese Peril, if such a thing really exists at all, is still biding its time.
Earlier this month the Bank of England took a dramatic monetary leap, largely in the dark. Since then, however, some actual economic data has emerged for July – which is of course to say, post-referendum. We do not yet have a completely clear picture of the Brexit result’s impact on the country. And we still remain part of the EU for now (and are included as such, hilariously, in an alternative analysis of the Rio medals table). So whatever impact is shown in the July figures – if any – will reflect nothing more than confidence.
What signals there are, have been mixed.
One area of concern has been the property market. So far this one is still a bit of a grey area though we do have some numbers. HBOS published their July house price index on the 5th and it showed a fall of 1% for the month – but this is a very volatile series and the smoothed year-on-year data was still running at +8.4%. (The Land Registry series, which is the most comprehensive and statistically robust overview of the residential market, will not be out until next month.)
We also had the RICS agent survey out on the 11th. Last month, a net +5% expected rising prices, down from +15% in June. This is a very volatile series which has ranged between -92% and +59% over the last ten years, with an average of zero. Furthermore the number, while reduced, remains positive so this is not perhaps as concerning as all that.
We will know more at the end of August when mortgage approvals data appear. Until then the mist over British housing has not quite cleared, but what we can discern ought not to panic us so far.
On the commercial property front, as widely expected, there was more evidence of gloom. The IPD dataset for privately-held assets posted a fall of 2.4% on the month with no new purchases made. Whether driven by sentiment or not, this may turn out to be an area where the bearish expectations for a Brexit result are borne out to one extent or another.
Turning to consumer activity, this might have been expected to drop off a bit if GfK’s confidence numbers were to be weighted with significance. But there is no evidence of this.
Firstly, new car registrations for July came in ever so slightly higher than in July last year (178.5k versus 178.4k). So there were no signs of decline on the Major Purchases front here.
Then we had retail sales data out yesterday. This was so strong it surprised everybody: +1.4% on the month, and +5.9% year-on-year, the highest annual rate since September 2015.
On the basis of consumer activity therefore one might be tempted to disregard those confidence numbers entirely, but it is early days.
On the industrial activity front we have almost nothing to report. (Production and growth data released this month pertained only to June.) On the 3rd we saw undeniably weak PMI data, pointing to a contraction: the composite indicator came out at 47.5, down from 52.5 in June, 50 being the neutral level. We will have to wait and see how this translates into the official statistics.
Arguably the most interesting data concerned price behaviour. CPI and RPI prints (out on Tuesday) showed a slight increase in headline inflation, up to +0.6% and +1.9% year-on-year respectively from +0.5% and +1.6% in June. But it was the industrial PPI data which caught the eye.
Sterling has of course weakened since the referendum and this was projected to lead to input price rises of 1.0% on the month and 2.0% on the year. In fact the outturns were +3.3% and +4.3%, materially higher than the highest individual forecast in each case.
Look below the surface and there could be more of this to come. After all, the trade weighted sterling index for July averaged 7.4% below its level for June and 14.9% below the average for July 2015. Offsetting this was the soft oil price last month, down 6.5% from June on average and 18.2% below the average for July 2015 as measured by the Brent Crude future.
Now the average price for oil in August-September last year was $48.46 per barrel, as against over $50 today. This is significant because it means the impact of the pound’s weakness on input prices is not likely to be contained by the disinflationary influence of cheap energy over coming months. And unless sterling stages a big rally the inflationary impact from the currency will persist for up to a year. That inflation – which means higher costs for industry – will need to be passed on to consumers or it will squeeze margins. The other side of the coin is more competitive exports, of course, but this aspect is bad news for the economy.
Finally, the employment data on Wednesday drew some attention from people who seem to have expected instant post-referendum trauma from this textbook lagging indicator. (In the event the ILO unemployment rate was unchanged at 4.9% with the claimant count down by a few thousand.) This says more about the level of bearishness in some quarters than anything else. Similarly, today’s numbers on government borrowing might well have been a little worse than hoped for but in the words of the Office for Budget Responsibility: “Any underlying weakness in the latest data is mainly likely to reflect pre-referendum economic activity.”
Overall there is little reason to panic as Britain’s post-referendum economic landscape has begun to reveal itself. On the bear side, commercial property is an obvious one to watch, and imported inflation could start to cause headaches into the end of the year. Elsewhere there is but little sign of any stress in the residential property market. Indeed, the UK consumer has shown clear signs of increased activity.
We shall of course have to wait and see what happens next – not least in terms of the Brexit deal which is ultimately, at some point, secured. But if we look at the numbers which have come out over the last couple of weeks it does appear that the Bank of England has sacrificed its inflation target prematurely.
Since the summer of 2014 the economic landscape has changed in ways which ought to have brought joy to consumers in various parts of the world. The oil price has collapsed: good news for significant net importers like the USA. There, as in Britain too, job growth has brought the country to near-full employment. In the UK last year we saw positive, sustained growth in real wages for the first time since the Great Recession. In Europe and Japan, which have lagged those other economies in growth terms, central banks have tried to oil the wheels with rate cuts and the expansion of unconventional monetary measures.
Yet this week there were headlines in Britain about the weakness of consumer behaviour. It looked a running certainty earlier this year that the market panic was overdone. But are there signs showing here of strength for the bear case after all?
Looking at the UK first of all: no, not really. Consumer confidence reached 15-year highs last year, and while the survey measure has lost some steam into 2016 it remains above the running average over the year before that. Scrabbling around for negatives, the rate at which new car registrations increased fell to +6.5% in 2015 from +8.6% previously. This is hardly disastrous. And broad retail sales growth across all sectors averaged +4.5%, an 11-year high. The GDP print for Q4 2015 put the annual increase in household expenditure at +2.7%, up a little on 2014 and in line with long run averages. And while readers will know this blog is ambivalent on the subject of housing itself at present, mortgage approvals staged a recovery last year too after falling away in 2014 and that pickup has continued since year end.
The picture is a little cloudier across the Atlantic, but again, far from catastrophic. The personal consumption component of GDP for Q4 grew by +2.7% on the year – also in line with long term averages – though in this instance down from +3.2% in Q4 2014. Retail sales growth has fallen more obviously too, to a 12-month running average of +2.7% to March of this year down from +4.1% across calendar 2014. What is equally interesting, however, is that auto sales over the same period averaged 17.4m, up by a full 1m on 2014 and running at a 15-year high. Existing home sales, too, quickened in pace to the highest level since the credit crunch. Perhaps this is a sign that the net impact on consumption from oil has been disappointing, but that credit expansion has fueled asset purchases instead (a supposition reinforced by a rise in the level of student debt per capita). One can be ambivalent about this again, of course – but it is expansionary economic activity driven by consumer behaviour.
At the other end of the growth spectrum, Japan has had a terrible time of it in recent quarters. At the same time, recovery from yet another period of economic contraction has seen the downturn in household consumption as listed in the GDP figures abate, to a year-on-year pace of -1.3% for Q4 2015 as against -2.0% for Q4 2014. Car sales growth as well as broad retail sales growth has been flat; nationwide housing starts have risen measurably while condominium sales in Tokyo have declined again. So a more mixed picture here, but one which has not been declining any more than it has been showing signs of vibrancy overall.
Finally, Europe has also suffered something of a lost decade, having been through a double-dip recession which the US and UK were spared. Yet here the strength of the consumer has actually been most noticeable. The running 12-month average pace of retail sales growth is stronger now than it has been at any time since 2001. The household consumption component of eurozone GDP rose to an annual +1.7% in 2015 from 0.8% a year earlier, and sits well above the average of +1.1% seen since the zone began life in 2000. Data on building permits and mortgages outstanding show a marked rise over the last year, and passenger car registrations have been rising at a running average of +9.6% over the last twelve months up from +3.5% during 2014. It is most obvious to attribute stronger consumer demand here to cheap energy – as the eurozone is the biggest net oil importer by some distance, this is after all the most obvious place to look. (We should also note, however, that the unemployment rate has begun to fall at a faster pace in recent quarters too.)
For growth investors, growth rates have the constant potential to disappoint. These remain nervous, and volatile times. But if we take a good look at the available data there is nothing to suggest that developed-world consumption has done anything more than fail to respond to the theoretically benign tailwinds of cheap oil and monetary expansion in the way that some might have hoped. This is not the same thing as failing to respond at all.
During the summer of 2015 this blog dedicated a post to “Brexit”. The discontinuation of the United Kingdom’s European Union membership had become a possibility on the strength of a wafer-thin 12-seat governing majority won in May of that year by the only political party offering a referendum on the subject. Back then, it looked likely that
The economic consequences will equally obviously be argued over with increasing volume as the date for the Breferendum approaches. There is little to be gained by getting into that argument now as the actual consequences would depend on the options available to the UK should the decision to leave the EU be taken.
Lately, however, several analysts have been putting out research pieces making market calls on Brexit. This week the Chancellor himself joined the fray, trying to make it seem during his Budget speech that the Office for Budget Responsibility were all for “remain”. So what has changed? Do we know any more now about the economic or market consequences should Britain vote on 23 June to regain full political self-rule than we did the previous summer?
Mr Osborne said to the House of Commons on Wednesday that such a vote could entail “an extended period of uncertainty” which could depress “business and consumer confidence” and might mean greater volatility in markets. Couched itself in uncertain terms, it was damaging uncertainty which thus formed the substance of the Chancellor’s argument for the UK’s continued adherence to Brussels, and which forms the substance of those of others on his side of the discussion.
Dealing with what ought to be the most obvious point first: markets are quite capable of exhibiting volatility without political assistance. Just look at the past 18 months. First, tumbling oil took 90-day historic volatility on the S&P 500 to its highest level since mid-2012. Then the turmoil over the summer and into the end of last year pushed it up further, into a range not seen since the panic over eurozone sovereign debt and the attendant market crashes of 2011. A Brexit vote might well ginger markets up a bit, but this is nothing new: it has nothing to contribute to the argument one way or another.
The point about business confidence specifically, as opposed to the impact of any future post-Brexit agreements on international trade, needs to be addressed in two different ways.
Firstly, there is now evidence on this subject from business leaders themselves, and they are divided: as the referendum has drawn closer, British executives, entrepreneurs and spokespeople have come out on both sides of the debate. Foreign investors, too, have given conflicting guidance. JP Morgan and Goldman Sachs announced donations to the “remain” side back in January, and other Wall Street firms have considered throwing in their lot, hinting at their preparedness to move to Frankfurt or similar. On the other hand, overseas car firms with UK plants began indicating a strong willingness to look through the vote and stay invested in Britain as far back as the autumn. So far, then, there has been uncertainty, but no more concerted gloom from businesspeople than there was several months back.
Secondly, as with markets, the corporate sector – including financial services – must have an eye to considerations beyond the political. Skill sets, regulations, tax, costs – including relocation costs – and other factors all enter the mix. Again, this is nothing new: whatever the decision in June, Mr Osborne and his successors at the Treasury are arguably more important in this context.
Consumer confidence is driven by earnings, employment, house prices, inflation and interest rates. The more secure we feel in work, the more we have to spend and the more stable the required level of our spending on goods and services, the greater our confidence in the economy and the more aggressive our activity within it. The impact of Brexit on those factors is no clearer today than it was after the general election.
Finally, much of the economic analysis of Brexit has centred on the pound. The consensus seems to be for devaluation to one degree or another (20% from Goldman Sachs earlier in the year). Yet when Scotland looked like it might vote to leave the United Kingdom back in September 2014 the most significant one day fall in the trade weighted sterling index was -0.9%. The splitting up of the currency’s economic area was a real prospect at that time yet it hardly budged. Again, this analysis is purely speculative, and for the same, over-arching reason: it is trying to analyse something which doesn’t exist.
Should the UK “vote leave” this June, then, there may be market turbulence attributable to this. Nobody knows – just as nobody knew back in the summer.
Brexit would be a historically significant political event, not an economic one. And should it occur, then whether it would present more of a threat to or opportunity for the country’s economy would depend on the political response.
Readers may well have their own opinions on how confident, or otherwise, to feel about this.
As market bears know all too well, one of the world’s crushing problems at present is China, and everything connected thereto. At the height of the panic which made for such an enjoyable start to 2016, one specific pointer towards China’s imminent and terminal doom was identified as her debt “binge”. Only this Wednesday, this very same binge headlined a blog post from The Economist magazine which warned:
“DEBT in China is piling up fast. Private debt, at 200% of GDP, is only slightly lower than it was in Japan at the onset of its lost decades . . . and well above the level in America on the eve of the financial crisis of 2007-08 . . . The value of non-performing loans in China rose from 1.2% of GDP in December 2014 to 1.9% a year later. . . .”
Specifics such as these betoken credibility. Yet they also invite questions. What does “private debt” mean? Which matters more: the 1.9%, or the 200%? What are the equivalent numbers for the other economies mentioned?
Let us start with the components of “debt” in China. First of all the only one which the bears seem not to want to mention: sovereign debt. This is estimated at 43% of GDP by the IMF on a gross basis for 2015. At the same time, however, China has huge sovereign reserves – about $3.2trn at the moment, again on IMF numbers, which is about 31% of 2015 GDP. With the country targeting a fiscal deficit of 3% this year and reserves trending downwards since 2014 it is true that the country’s sovereign debt position is deteriorating on a net as well as a gross basis but it should be obvious that it is nobody’s idea of a crisis. (UK sovereign debt was 88% of GDP on the same, gross basis in 2014, the eurozone’s over 90%, the USA’s over 100% and Japan’s approaching 250%.)
The “private debt” figure mentioned in the quote comprises a corporate (non bank) debt ratio of 165% and household ratio of 40%. That sounds a lot scarier than 43%. But it is not far off similar figures in other places. Only yesterday the Federal Reserve published America’s balance sheet for last year showing non-bank corporate and household debt of 74% and 82% respectively, making “private debt” of 156% altogether. Lump in sovereign and financial sector debts too and the total comes out at a cool $63.4trn, or 364% of US GDP. (The equivalent figure for China is 247%.)
The UK’s balance sheet comes out even worse than this on a broad basis due to the massively distorting impact from the financial sector. According to our own balance sheet, our total financial liabilities for 2014 came out at a nice, round £30trn, or about sixteen and a half times our GDP that year. Use net figures for the financial sector, however, and this plunges down to a much less startling 487% of output, of which a mere 349% is that “private debt”.
These sorts of numbers are esoteric territory, and not usually visited by relevant parties such as ratings companies. There are reasons for this. Vast swathes of the figures are prone to uncertainty and conceptual artificiality, for instance. We can look at government budgets, and bond yields, and arrive at a view on the sustainability of a country’s debt position. But what is the household sector surplus, or deficit?
Let us draw a line under these “private” or “total” debt to GDP arguments now and move on to non-performing loans. The banking system NPL ratio did rise from 1.5% to 1.6% in 2014 and will have risen further last year. The government is working on new measures to convert NPLs into equity stakes in struggling companies and one can read this bearishly. Whatever the final announcement and accompanying figures on this front, however, we do know that the required reserve ratio for major banks stands at 17% despite recent monetary loosening, up from 7.5% a decade ago. We must, as always, wait and see. The time bomb expected from Chinese trust investments two years ago failed to detonate, but bond defaults have been making headlines. Perhaps this time the country’s banking system, strongly capitalised as it is, will blow up in the face of an NPL crisis the government is already taking measures to manage.
The Chinese economy, like all economies, has its problems. And like the problems of other countries, some of these are local in nature. But in talking up a catastrophic debt burden where none really exists the bear case overreaches itself. There is enough out there to worry us in the real world – we do not have to look for phantoms.