CLSA's Cheung: Forced Deleveraging In China Will Put Pressure On Stocks, Economic Growth In Near-Term (Two Interviews)

Francis Cheung, head of China and Hong Kong strategy for CLSA Asia-Pacific Markets, told Bloomberg TV on January 6, 2014 that reforms in China, mainly the forced deleveraging of local government debt, will put pressure on economic growth and the stock market in the near-term. He said: "The two biggest priorities for the government is actually overcapacity and local government debt. To manage these problems is essentially a deleveraging process that's going to pressure growth. I don't think that's factored into the market yet."

He also said to wait until the second half of 2014 to buy Chinese A-shares. Here is the full Bloomberg TV interview.



Here is more info on the amount of local government debt outstanding in China. According to AFP on December 30, 2013: "...liabilities carried by local governments ballooned to 17.9 trillion yuan ($2.95 trillion) as of the end of June. The figure, released by the National Audit Office in a statement on its website, compared with 10.7 trillion yuan as of the end of 2010 -- an increase of 67 percent."

In addition, Kynikos Associates' Jim Chanos told CNBC on September 18, 2013 that "every three to four years at the current rate, China is doubling its debt relative to its GDP." And Charlene Chu, formerly of Fitch Ratings, told Bloomberg TV on June 26, 2013 that by the end of 2013, "China will have replicated the entire U.S. system in five years." She also told The Telegraph: "The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation."

CLSA's Francis Cheung was also interviewed by the Financial Times in November 2013 and explained China's debt and excess capacity problem with charts. He showed that China's Capacity Utilization percentage has been falling while its Debt/GDP and Incremental Capital-Output (Δgross capital formation/ΔGDP) ratios have been rising. This divergence clearly shows how inefficient China's leveraged fixed asset investment boom has been, hence why deleveraging and asset sales need to occur (eventually). Cheung thinks the Chinese government's stimulus program would have been more efficient if it spent more money on infrastructure and less on industrial capacity.



Related: Commodity Prices, Shanghai Index Still Worried About China's Economic Growth, Rebalancing $SSEC $CRB $CCI

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