Jim Chanos recently said with reference to China (FXI) (YINN) that “the banking system is loaned up.” Debt is growing twice to three times as fast as the economy, noted Chanos. Under the aegis of President Xi, the CBRC (China Banking Regulation Commission) is currently on a mission to curb the mounting $28 trillion debt load that’s currently weighing down the economy at large.
Kyle Bass has identified a key risk in the Chinese economy. Bass notes that so far in 2017, M0 or narrow money (which includes coins and notes in circulation and other money equivalents that are easily convertible into cash) has been declining. At the same time, M2 (which includes M1 plus short-term time deposits in banks and 24-hour money market funds) has been rising at its regular (rather rapid) pace. “You cannot grow M2 at 12-13% when M0 is declining,” exclaimed Bass.
Capital markets restructuring
Entrusted investments, which include wealth management products, have reached a whopping $1.7 trillion in China. The schema is increasingly being blamed for adding excess leverage while reducing transparency in China’s financial system.
The balance of payments/currency issue
The surge in M&A activities (MNA) (MRGR) abroad by Chinese investors, some with the sole purpose of financial diversification, paying little or no heed to the synergy generated, has led to a downward pressure on the yuan.
While Dalio enumerated these concerns, he also noted that these issues are being “well managed”. For instance, we’ve seen authorities in China strengthening capital controls in the form of restrictions on overseas investments and additional charges on remittances to support the yuan since the start of 2017. These measures have been lending support to the yuan. Then, there’s the regulatory crackdown on financial institutions to curb the shadow banking system in China.