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Some people think that China is but a faraway place that could not have much effect on UK shares. But consider this: China is now the largest economy in the world; it has contributed the greatest part of world growth over the last ten years; its banks and its corporations are enormous, currently hoovering-up massive western companies, and; if you combine the Shanghai, Shenzhen and HK stock markets you have a total market capitalisation of US$10.5trn (greater than Nasdaq, greater than London and Tokyo combined).
And, right now, this entire system is vulnerable to the slightest shock. If banks go kaput in China then markets will suffer right around the world, from the London property market to Hollywood and Wall Street.
The Chinese financial eco-system, with its legion of short-term “wealth management products” pumping money from savers into banks, insurance companies, local authorities and corporations, might prove to be built on sand – short term loans, which are then used to buy all sorts of assets, from land in China to UK companies and property. The whole system relies on a regular rolling-over of those loans.
The government has the delicate task of de-risking the financial system by controlling the amount of money going into risky structures, but one slip and there could be a collapse of confidence and run of savers for the hills.
The academics view
Right at the end of the book Manias, Panics and Crashes Aliber is bold enough to postulate a house price crisis in China (Kindleberger and Aliber, 2015) .
The analysis starts with the observation that for much of the last decade housing unit production has been 10m per year, with this sector accounting for 10% of GDP.
Perhaps 20-30% of the new house units are bought by investors as a store of value (2-3% of GDP) but will remain unoccupied.
If economic growth slows because of, say a lowering of exports due to low-cost economies such as Bangladesh outcompeting the middle income Chinese, then the flow of people to the cities will slow and the demand for new apartments will fall.
The price of apartments will rise less rapidly. Developers will suffer. Prices eventually………………………………………………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
