The latest Global Investment Strategy Weekly Report entitled “China Needs More Debt” focuses on the premise that China has fallen into the same sort of “fiscal trap” that ensnarled Japan in the 1990s. Unprofitable investment projects undertaken by Chinese state-owned enterprises are a necessary evil, comparable to Japan’s “bridges to nowhere”. China’s underlying problem is not that the economy suffers from overinvestment. Instead, the country is demand deprived; discussions of overinvestment confuse the symptom with the disease. Structural factors will ensure that China continues to churn out ample savings for years to come. Any efforts by the Chinese authorities to curb credit growth will result in a sharp economic downturn. China will continue to generate excess capacity and export deflation to the rest of the world, which is positive for bonds. The government will stealthily backstop bank loans in order to ensure that banks keep lending without the embarrassment of having to undertake highly-dilutive capital raises. We recommend going long the most hated equity sector in the world: Chinese banks.
About Peter Berezin
Peter Berezin joined BCA Research in 2010 and is currently BCA’s Senior Vice President, Global Investment Strategy. He also oversees BCA’s Equity Trading Strategy service, which he helped develop and launch in
2015. During his tenure at BCA, he has also served as Chief Strategist of The Bank Credit Analyst. Prior to joining BCA, Peter worked for three years as a Senior Global Economist and Market Strategist with Goldman Sachs in New York. Previously in his career, Peter spent seven years with the International Monetary Fund, where he was involved in program negotiations and surveillance in a variety of countries with a special focus on bank restructuring in Asia. He was also a member of the IMF’s Research Department, where he contributed to the Fund’s flagship publication, the World Economic Outlook. Peter has extensive experience in analyzing global economic and financial market trends and is widely quoted in the financial media. He has a Bachelor of Arts (Economics) from McMaster University, a Master of Science (Economics) from the London School of Economics, and a PhD in Economics from the University of Toronto.