FXStreet (Delhi) – Michael Every, Head of Financial Markets at Rabobank, suggesta that we are rapidly approaching the Year of the Monkey and this sign of the zodiac is associated with curiosity, mischievousness, and cleverness.
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“That seems appropriate, as to get a serious grasp on what is happening in China, and by extension what to expect from CNY and CNH, requires asking some difficult questions and thinking outside the traditional box.
It is hardly a secret that the Chinese economy has a debt problem. A few years ago that was a more controversial statement, but today there is consensus around the issue. However, there still appears to be some misunderstanding of just how serious the problem is. Our estimate for China’s broadest debt-to-GDP ratio covering both the public and private sectors continues to rise, and at the end of 2015 we estimate it stood at 312%, up from just 161% in 2006.
That is worrying enough. However, it is worse when one considers that in all likelihood the debt side of the equation is an underestimate while the GDP side has been an overestimate since at least 2012, as suggested by many indicators, including the Li Keqiang index (an unofficial proxy for China’s GDP growth that has diverged sharply from the official measure in recent years).
Indeed, if from 2012 onwards we increase China’s nominal GDP by the rate shown in the Li Keqiang index rather than official GDP data, we see that 2015 debt-to-GDP might be as high as 346%. That is not far from the prevailing levels in far wealthier developed economies, most of which are considered to be carrying too much debt, and vastly higher than any comparator in the emerging market universe.”
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