ANALYST: China’s ‘Long-Awaited Day Of Reckoning’ Is Almost Here

Wednesday, January 28, 2015
By Paul Martin

LINETTE LOPEZ
BusinessInsider.com
Jan. 28,2015

All the devils have come together for the Chinese economy, and the country’s “long-awaited day of reckoning” is upon us, Societe Generale analyst Wei Yao writes in a recent note.
To China bears who have said the country is a debt bubble, Wei’s conjecture will seem obvious. To bulls, it raises another question: Where did these credit problems come from? Where have they been hiding?

Wei’s answer is simple: Problems have been lurking within state-owned enterprises (SOE) and in a lesser sense in local government financing vehicles (LGFVs).

China’s credit growth has been outpacing its nominal economic growth for six years. The puzzle has been the lack of credit problems, but there is actually a simpler explanation — the pervasive implicit state guarantee. No one, especially not Chinese policymakers, has ever disputed that this has to change. Rather, the question has always been when. The series of recent reform action suggests that we are approaching this long-awaited day of reckoning, as local governments’ ability to extend credit guarantees gets checked at a time of slowing domestic growth and tightening global liquidity.

The Rest…HERE

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