Fancy a Slice of China’s $2.2 Trillion Bad Debt?

Friday, 7 February 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • Don’t be a hero

It may not be efficient…or sustainable.

And it’s requiring ever more input to achieve the same growth targets.

But, like it or not, debt has been the engine of growth across the globe for decades.

Australia’s ‘miracle economy’ certainly owes its recession-free run to cheap money. So cheap it’s seen total government debt top $1.08 trillion, according to the Australian Debt Clock.

Total Aussie household debt’s even more staggering, coming in at $2.7 trillion.

The US has been borrowing with abandon as well. The total national debt just exceeded US$23.3 trillion (AU$34.7 trillion). And it looks like the government may be running US$1 trillion annual deficits moving forward.

Then there’s China.

China’s national government debt comes in at $7.7 trillion. That’s almost half the nation’s GDP. But the private sector debt is far more concerning, as that’s where we could be looking at a massive wave of defaults.

PricewaterhouseCoopers reports that stressed assets and nonperforming loans in China reached US$1.5 trillion in 2019. And this figure is expected to grow.

While that’s enough to stoke fear in most investors, some see it as an opportunity.

From Bloomberg:

China’s massive pile of soured debt is set to get even bigger, giving foreign investors more opportunities to try to profit from the cleanup…

The mountain of soured borrowings is rising as the world’s second-largest economy opens further to foreign capital. As part of a recent trade deal, China is now allowing U.S. firms to apply for licenses to buy non-performing loans directly from banks.

I say good luck to them! Particularly with the vast unknowns ahead yet with the deadly coronavirus.

Also from Bloomberg:

The contagion could “wreak havoc” in certain areas of the economy and there will probably be a substantial increase in distressed debt unless the central bank injects liquidity, according to Oaktree Capital Group LLC’s co-chairman. China’s beleaguered banks could take a $800 billion hit as the sickness threatens large swaths of the economy, S&P Global Ratings said.

More, after a look at the markets.


Overnight, the Dow Jones Industrial Average closed up 88.92 points, or 0.30%.

The S&P 500 closed up 11.09 points, or 0.33%.

In Europe the Euro Stoxx 50 index closed up 27,68 points, or 0.73%. Meanwhile, the FTSE 100 gained 0.30%, and Germany’s DAX closed up 96.49 points, or 0.72%.

In Asian markets, Japan’s Nikkei 225 is down 48.64 points, or 0.20%. China’s CSI 300 is down 0.58%.

The S&P/ASX 200 is down 36.60 points, or 0.52%.

West Texas Intermediate crude oil is US$51.35 per barrel. Brent crude is US$54.93 per barrel.

Turning to gold, the yellow metal is trading for US$1,566.65 (AU$2,330.63) per troy ounce. Silver is US$17.81 (AU$26.50) per troy ounce.

And bitcoin continues to close in on the psychologic US$10,000 mark. One bitcoin is worth US$9.787.99.

The Aussie dollar is worth 67.22 US cents.

Don’t be a hero

It’s hard to get away from the potentially devastating fallout from the coronavirus.

While markets have largely shrugged off the fears over the past few days, that could change at any time. In fact, Aussie and Asian markets are ignoring the strong overnight performance in Europe and the US and selling off as I write.

Futures in US and European markets have also slipped into the red since this morning.

Writing from Spain, Selva Freigedo — our Aussie-based analyst for Harry Dent’s Boom & Bust Letter — reveals the precautions she saw on display during her flight from Melbourne.

Face masks are becoming a common sight at airports.

Taking a flight from Melbourne to Spain, there were plenty of people wearing them. It was a similar sight at Doha, my first stop, and then again in Barcelona.

While wearing a mask in public places is quite common for Asians, the practice is now extending.

It’s not surprising, there is a lot of fear about the coronavirus. It is also quickly curtailing Chinese tourism.

If you’ve visited any top tourist destinations, in Australia or internationally, you’ll know a lot of Chinese travel abroad. And they’re not shy about opening their wallets.

In fact, China leads the world in international tourism spending. In 2018 Chinese visitors splashed out US$277 billion. And a lot of that was spent in Australia.

Last year, Chinese tourists passed our Kiwi neighbours to become the biggest cohort of short-term visitors. But that’s all under threat with travel bans and quarantines closing the door to China.

That’s sure to crimp the tourism sector. An industry that brought in $37 billion in 2018 from foreign visitors alone.

But Selva’s concerns run deeper than the immediate impact on Australia’s tourist markets. She believes the latest viral outbreak could be the ill wind that blows down China’s house of cards.

Add to the coronavirus fears, the trade conflict with the US and Hong Kong protests and China has plenty of open fronts.

That doesn’t mean it’s time to run for the hills just yet. It’s impossible to say how this will all pan out.

But for investors, diligence and patience are in order.

Rodney Johnson, Harry Dent’s US-based analyst sums that sentiment up here:

Everything from oil to the travel industry has been smacked around as investors try to determine how long China will be operating at a lower level, and how that might affect revenue and sales at different companies.

This isn’t the time to be a hero investor, trying to pick the bottom. Let the markets come to you. If you’ve had your eye on a company, be ready to invest when we get news of a potential vaccine or when we see the curve of infections begin to flatten.

We’ll leave it here for today. And hope when I write to you again on Monday that rumours of a promising new vaccine prove well founded.