Talking about very vocal opinions…

Two First Global traders (based in India) wrote an intriguing and vocal article in the Business Standard saying that China’s growth model is fake and based on a “crime” (debt) that will bite back at some point, like it always had historically, calling it a $22 trillion time bomb. They also make a (doubtful) case that India has a better growth model… highlights below:

“For years… the [China] dream [of high growth with a very low debt-to-GDP ratio] has been so aggressively sold that almost everybody believes it, including editors of this newspaper who have written glowingly about China’s growth… Like all things churned out by Wall Street, this romantic story is also complete rubbish.”

“… it is instructive to remember what a crafty villain in an old Hindi movie said: “Har badi kaamyabi ke peeche koi gunaah chhupa hai…” (Behind every great success, lies hidden a great crime). Just as behind nearly every rapid economic growth story, lies hidden, debt. Usually lots of it. Just like Ireland that went from being a really poor country in the 1980s to getting to the top of European Union’s per capital GDP league tables — all within 20 years or so.”

“China has debt at various levels and pockets. Let’s add to this central debt, the local government and provincial debt figures… Let’s further add the obligations of the Ministry of Railways… let’s also add 80 per cent of outstanding bank credit… By pushing its lending via the banks’ balance sheets, China creates the impression of a country that has very low budget deficits and, of course, very low central debt.”

“The bigger problem lies ahead. Given this inclined treadmill model, if China grows faster, the bigger the debt problem becomes. For the sake of calculation, let’s assume … that China wishes to grow at eight per cent. The total debt-to-GDP ratio at the end of 2016 becomes 180 per cent, up from the 150 per cent of 2011! In absolute terms, China’s total debt will reach $22 trillion.”

A time bomb, indeed…

Source: Business Standard

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