Eoin Treacy's view -
How serious a threat is China’s debt? See attached speech by the Governor of the Reserve Bank of Australia.
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“The deepening relationship has also benefited China in many ways,” the governor said. “We will of course have differences from time to time, but we will surely be better placed to deal with these if we understand one another well”.
The Reserve Bank now employs three staff full-time in Beijing to monitor Chinese economic and financial developments.
“The complex web that has developed in China is characterised by opaque risk transfers, implicit guarantees and complex connections,” the governor said. “The influence of the state and the incentives within financial institutions have almost surely distorted credit allocation and led to some poor lending decision” he added.
More than 3500 “shadow banks” have emerged in China, which provide an array of riskier financial products outside the state-controlled banking system.
“The extent that experience elsewhere in the world is any guide, it is difficult to escape the conclusion that this complex web in a highly indebted economy is a risky situation,” Dr Lowe said. Combined, shadow banks now make up 45 per cent of credit, up from 25 per cent a decade ago.
“The build-up of financial risks like those seen in China is almost always followed by a marked slowdown in GDP growth,” the governor said, stressing an economic collapse in China wasn’t inevitable.
I believe it is correct for Australian investors to keep a close eye on China. It was China’s unprecedented stimulus that helped Australia avoid recession during the global financial crisis because of its voracious appetite for commodities and if China eventually had a recession it will undoubtedly have a knock-on effect for Australia.
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