In case the latest roller-coaster ride in the markets hasn't been reason enough to be cautious, how about this latest bombshell out of China? According to Bloomberg and a few European financial news sources, a top-level Chinese think tank has just apparently warned that the Chinese markets could be on the verge of a financial crisis. In a leaked report, the government-affiliated National Institution for Finance & Development (NIFD) warns that "China is currently very likely to see a financial panic." In making its case, the NIFD refers to factors such as high default in the bond markets, tight liquidity conditions, and shaky equity markets. In addition, the NIFD notes that the leveraged stock purchases are back up their highest levels since 2015. That's right, remember 2015, the year when the Shanghai composite dropped by a third?
Whether or not you buy the sensationalized tone of the report, the NIFD is on to something. Amid all the hype about China overtaking the West (whether in GDP terms or in the number of tech firms sprouting up year) or its financial firepower, we must never forget that at its core, this is an economy fueled on debt and a highly intransparent shadow banking system. Taking into account government, household, and non-financial corporate debt, China's debt-to-GDP is now approaching 250 percent. Looking ahead, China's fiscal and monetary authorities are stuck between a rock and a hard place: either strike hard now to delever the financial system (and risk a near-term market correction), or keep pushing the issue off into the future (and risk a hard landing of even greater proportions down the road). Add into the mix US rate hikes and a looming trade war, and you have the recipe for a pretty nasty cocktail.
If nothing else, this should serve as a warning that, in this environment more than ever, a structured and disciplined investment approach should trump any temptations to chase new highs or to "go with what's hot."
Here's the link to the Bloomberg article:
The Shanghai Composite is down close to 20% year-to-date - start of a new bear market?
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