Salient to Investors:

  • Outstanding credit in China rose to 206.3 percent of GDP in Q2 2014 versus 166.6 percent at the end of 2011. Expansion in economy-wide credit has exceeded nominal GDP growth in every quarter since 2008.
  • Louis Kuijs at Royal Bank of Scotland wonders how this is going to end as China has decided that growth is still important and cannot meet its growth target without adding on more credit.
  • Yao Wei at Societe Generale said China has to keep pulling these levers if it wants to avoid a painful correction, as there could be a lot of defaults and systemic risk if growth slows, and housing continues to be a risk for growth.
  • Citigroup upped estimates of 2014 GDP growth to 7.5 percent, JPMorgan upped to 7.3 percent.
  • Michael Pettis at Peking University said China can get as much growth as it wants as long as it allows debt to grow commensurate. Pettis said China is not yet politically ready to deal with much slower growth, so we are continuing to see credit expanding much too quickly.
  • Lu Ting at Bank of America said the negative impact on the financial system is relatively small because China is relying more on the central government than local authorities and the PBOC is providing some funding.
  • Li Miaoxian at Bocom Intl said credit risks for infrastructure projects and affordable housing are smaller than general property projects.
  • George Magnus at UBS said the root-and-branch reform proposals for China’s growth model are at best a work in progress, and more likely, rhetoric, and its economy continues to be driven by credit-fueled investment spending and rising levels of debt.

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