China “not all doom and gloom”

China bicyclesWhile China has undoubtedly been faltering, the country’s economic demise has been greatly exaggerated, according to investment firm Source.

Source, a provider of exchange-trade funds (ETFs), has released China in Pictures, a report in response to how global financial markets reacted to the Shanghai Composite Index rout over the last few months. One symptom of the rout was investors pulling $9 billion (€8 billion) out of emerging market ETFs in August alone.

However, Paul Jackson, head of multi-asset research at Source, says: “While the Chinese economy has almost certainly been decelerating, it was reassuring to see that the data produced in the country seems more reliable than many seem to think.”

The report highlights that Chinese banks are 90% funded by deposits, capital ratios are acceptable and the country is self-funded with massive external assets.

China has huge foreign exchange reserves and increased government debt could cover a large debt black hole.

However, while Jackson says it's not “all doom and gloom”, Source says there are some worrying signs in the Chinese economy. With total debt equal to 230% of GDP, this could limit growth and present a systemic risk. The corporate sector alone has added debt equivalent to 50% of GDP in six years.

Source finds that the Chinese currency, the renminbi, is expensive against the dollar and thus could decline further, despite a devaluation of almost 2% in August. Also, China is unlikely to come to the rescue of commodity markets, and although its stocks are no longer expensive thanks to recent policy actions by the government, the firm suggests caution.

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