Salient to Investors:

Naoki Kamiyama and David Cui at Merrill Lynch said:

  • China is weaker than it appears, resembles Japan in 1992, and may enter an asset-deflation phase.
  • China’s imbalanced growth, government stimulus, overcapacity, overwrought housing market, and severely under-capitalized financial system may be a more serious problem than Japan’s was in the late 1980s and early 1990s.
  • China has repeated Japan’s missteps: being overly dependent on exports, China resorted to stimulus when export demand fell in the financial crisis, causing an asset bubble which it is seeking to deflate with tighter monetary policy.
  • Property prices may be starting to fall, with non-performing loans in commercial banks increasing more in half1, 2014 than in all of 2013.
  • China won’t resume its growth path until it resolves its long-overdue bad debt problem and massively recapitalizes its financial system – at least 1-2 years away because the new leaders are still consolidating their power.

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