Amidst the “Brexit” concerns and even a “Rexit” (the departure of Raghuram Rajan, Reserve Bank of India’s current governor), we must not forget that the entire world does not just revolve around the Western region.
Furthermore, we must remember that Singapore’s annual Gross Domestic Product (GDP) would only fall by approximately 0.2 percent.
Local stocks guru and trainer Daniel Loh previously opined that a Brexit would undoubtedly have an impact on Singapore, albeit a muted one.
As such, we are generally more concerned about mid- to long-term drivers of global economic growth, specifically China.
This time, Daniel shared some of his thoughts when we posed three concerns about the Chinese economy – shadow banking and debt, reduced coal production, and overall growth.
Despite the concerns that we raised, Daniel still thinks that China is attractive, especially when it “bottoms” out this year end.
Shadow Banking and Debt
China’s Growth has been a huge topic for the longest time – ever since their annual real GDP growth left the double-digit zone.
To make things worse, some experts are bringing China’s debt problems to the forefront, proposing that debt levels have raised to historical highs.
Will shadow banking be a huge problem, considering that it had contributed to China’s debt levels?
Daniel: I don’t see any problems with shadow banking in china because of two reasons.
Firstly, the amount of shadow banking assets in China have remained relatively low from a global perspective.
In 2013, China only accounted for 4 percent of the universe of nonbank financial intermediation (a broad-based measure of shadow banking) monitored by the Financial Stability Board (FSB).
US$3 trillion of shadow banking assets are lower than US and European Union with US$25 trillion each – maybe we should worry more about the US than China if shadow banking is a problem.
Secondly, the origin of Chinese shadow banking growth originated from the relative lack of alternative funding channels for small- and medium-sized enterprises (SMEs).
Shadow bankers, I think, provide the much-needed credit to the enterprises or property developers who were unable to obtain financing from banks.
Without shadow banking these few years, the Chinese economy would have collapsed to an economic state worse than now.
In my opinion, shadow banking is not a huge threat to China’s economic recovery – it is the government initiatives and policies that are more important.
With a Debt-to-GDP ratio of 43.9 percent (stats from tradingeconomics.com), this is less than the US’s 104 percent, the European Union of 85.2 percent, and Japan’s 229 percent.
Therefore, I don’t see debt in China being a big problem.
Reduced Coal Production
It was reported in Bloomberg recently that the Chinese government wants about 500 million tonnes of coal production shut down by 2020.
Reuter reported that China produced 3.7 million tonnes coal last year and has an estimated capacity surplus of 2 billion tonnes per annum.
Daniel: With the pollution problem getting worse, I think it is a must to adopt cleaner energy generating methods.
This is what all big economies are facing.
In the last few years, there seems to be a slowdown in clean and alternative energy industries funding initiatives and government support due to their economic and stock market problems as well as domestic corruption problems.
I sure hope the government do pick it up again.
In other words, Daniel is not too concerned about the coal surplus because ultimately, most economies are moving over to clean energy.
Despite these concerns, Daniel still seems to be quite optimistic about China, especially in the mid- to long-term.
Daniel shares some indicators that we can look out for – these might be signs that the China economy is rebounding.
Daniel: Persistent stimulus measures are one of my reasons to believe that China is attractive in the mid- to long-term.
China’s economy might not exactly recover right now, but bottom in the short to mid-term.
I think they might probably recover next year.
In my opinion, the only reason China economy is performing less than expectations these few years is because of all the government tightening measures.
There are absolutely no problems with their debt or shadow banking as explained above.
They do not have an old age population problem like Japan, nor are they an old developed country like Britain that can’t seem to innovate anymore.
But, of course, the world needs to understand why China needs to slow its GDP down back in 2011.
It was because an 11- to 13-percent annual growth is “unhealthy” for China – in the long run – that was why they slowed it down.
The world will probably soon adjust their expectations of China.
China economy will recover once the government wants it to.
And that is the reason why they implement stimulus measures ever since 2014.
It takes about a few years before the stimulus takes effect, therefore, I do think that China economy might bottom this year.
Daniel previously shared about how we can use Singapore REITs as both a hedge and potential for profits in the current economic climate.
He will be sharing in more detail about his thoughts on US Fed rate hike, Brexit, China and commodities in an upcoming FREE seminar.
Daniel was previously very bullish about commodities and various related stocks had rallied over the past few months.
Nevertheless, there are still certain commodities that have not rallied but Daniel thinks that there is upside potential for profits.
Click on the button below to register your free seats now. Limited availability.