China Needs More Debt

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.

To access the report entitled “China Needs More Debt”, please click here.

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