Roach v. Pettis: Opportunity Or Caution For US Investors In China?
Cam Hui | Jul 07, 2013 01:50AM ET
Stephen Roach recently penned an article entitled "interview with Ron Rimkus of the CFA Institute , Pettis stated:
You can only resolve a bad debt problem by assigning the cost to some sector of the economy. In the past it was the household sector that implicitly paid to clean up the debt, but if we expect rapid growth in household consumption to lead the economy going forward, and this is what rebalancing means in the Chinese context, we cannot also expect the household sector to clean up the bad debt in the same way it has done so over the past decade.
So who pays? In the worst case, it could lead to a disorderly unwinding of the excess leverage in China which, given how the global financial system is inter-connected, spark a global financial crisis.
In addition, Kyle Bass sounded a warning on China (via Zero Hedge) [emphasis added]:
The speed and depth of the Chinese policy response will help determine the severity and duration of this crisis. If the Chinese address the issue quickly and move decisively to rein in credit expansion and accept a period of much lower growth, they may be able to use the government and People’s Bank of China’s balance sheet to cushion the adjustment in the economy. If, however, they continue on the current path and allow this deterioration to reach its natural and logical limit, we will likely see a full scale recession as well as a collapse in asset and real estate prices sometime next year.
Even Stephen Roach sounded an implicit warning of potentially higher interest rates as China transforms itself:
But there is another twist. As China shifts to consumer-led growth, it will start to draw down its surplus saving and current-account surplus. That could lead to a reduction in its vast $3.4 trillion foreign exchange reserves, thereby dampening China’s demand for dollar-based assets. Who will fund a seemingly chronic US saving shortfall – and on what terms – if America’s largest foreign creditor ceases doing so?
China's transformation from investment led growth to consumer led growth is a story of short-term pain for long-term gain. The only questions are:
- When? And
- How much pain?
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