Economists and investors around the world are finally getting used to the idea that China's years of blazing hot growth are a thing of the past.
While GDP will continue to be above average for years to come, China's policymakers are pushing reforms to cool its housing market, legitimize its financial system, reduce corruption, and rebalance its economy as one driven consumption, not exports.
However, the cost of all of these efforts is slower growth. And with public and private financial liabilities sky-high, more and more experts are worried that China will experience a hard landing, a scenario where the economy decelerates to roughly less than 5% causing unemployment to spike and social unrest to sweep the cities.
As you can see from the chart above, GDP expectations are coming down quickly. And behind those numbers are disturbing trends in demographics, credit, housing, and other fundamental factors that are supposed to fuel the Chinese economy.
Private sector leverage is at a level that puts China at risk of a credit crisis.
"Private sector leverage is 17% above trend and on BIS analysis when its gets 10% above trends, there is a risk of a credit crisis."
-Credit Suisse
China's state-owned enterprises have uglier balance sheets than junk-rated US companies.
"China is not unique in having experienced rising corporate leverage in recent years – the same can be seen in other parts of Asia as well as both the US and EM – but the pace and magnitude makes China stand out (see Leveraged China, May 3, 2013). Bottom-up corporate data – less controversial perhaps than the official macro data – suggests that leverage increase has been driven by the SOE sector which on average has tripled leverage in the past five years and which, at 4.6x gross has higher balance sheet leverage than, for instance, US sub-investment grade companies."
"Leverage in the private sector is higher as well, although not as aggressively, and with some dispersion which often relates to the demand trend of the industry. For instance, the property sector which has seen strong sales volumes has maintained more stable credit metrics than, say, the capital goods sector which is suffering from severe excess capacity."
-Morgan Stanley
China has the most levered companies in all of Asia.
"China's corporate sector is the most leveraged and solvency-challenged."
-Stephen Green, Standard Chartered
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