Econintersect: John-Paul Smith, the Deutsche Bank analyst who foresaw the 1998 Russian crash, says he is seeing the same signs for a financial meltdown in China that he saw in advance of the Russian collapse. He is taking that position in the face of bullish outlooks from many other sources. Bloomberg News says that Goldman Sachs Group Inc., Morgan Stanley and Jefferies Group LLC are among a number of investment firms that are forecasting a "massive" bull market for China's stocks over the next several years.
Here is an excerpt from the Bloomberg News article:
"There is potential for a debt trap in industrial companies which can trigger an economy-wide financial crisis as early as next year," Smith said in an interview from London on Dec. 12, a day after he issued a report predicting China's slowdown will lead to a 10 percent decline in emerging-market stocks next year. "If I am wrong on China, I am wrong on everything."
A liquidity squeeze escalated in China Monday morning as the 7-day repo rate rose another 60 basis points to 8.8%. This happened in spite of the People's Bank of China, the country's central bank, pumping money into the financial system. According to the Financial Times, rumors circulated last week that some banks were missing payments in the interbank market.
Credit markets in China are approaching the stress level that was seen this past June when the China interbank rate approached 10%. Following that near crisis short-term rates have remained elevated at nearly double the official inflation rate, indicating abnormal stress in the credit system.
See GEI News for a good summary of the June credit crunch.
Arabian Money puts the Smith prediction in perspective:
Mr. Smith argues: 'It is really at the corporate level and at the micro level in China that the fate of the financial market and the economy there is going to be determined. China is not such a safe haven as most market commentators appear to believe.'
In short we are waiting for a credit event or black swan to occur. It is not hard to imagine that somebody in China is hugely overborrowed and will be pushed over the edge by rising interest rates. How long that will take to happen and whether the government would save them is far less easy to predict.
Mr. Smith's prediction is a bold one and by sticking his head above the parapit he risks getting it blown off before he is proven right.
- Russia Crisis Haunts Deutsche Bank’s Smith Seeing China Bust (Lyubov Pronnina, Bloomberg News, 22 December 2013)
- China cash squeeze worsens despite central bank efforts (Simon Rabinovitch, Financial Times, 23 December 2013)
- China Interbank Rate (Trading Economics, 23 December 2013)
- China Financial "Crisis" Eases? (GEI News, 22 June, 2013)
- Deutsche Bank analyst who called the Russian default in 1998 says the same is about to happen in China (Arabian Money, 23 December 2013)