Thursday, June 1, 2017

Why China’s Debt Downgrade is a Tempest in a Teacup

Why China’s Debt Downgrade is a Tempest in a Teacup

Mike Burnick | Wednesday, May 31, 2017 at 7:30 am
Mike Burnick
Last week, Moody’s downgraded its credit rating on Chinese debt. So what?
Since then, the talking heads on CNBC have been out in full force claiming that China is doomed to default on its growing debts.
But this tempest in a teacup shouldn’t worry you one bit. In fact, the Moody’s downgrade could be a wonderful contrarian buy signal for Chinese shares. Here’s why…
Granted, China’s debts have ballooned in recent years. In fact, total Chinese household and corporate debt now stands at 220% of GDP. It has expanded by $19 trillion over the past eight years alone.
It’s easy to see how these “scary” headline numbers could be used to frighten investors away, especially when those figures get taken completely out of context from what’s actually happening in China today.
First, financial stability is actually improving in China right now, and it has been steadily on the upswing since the end of last year. The Bloomberg China Financial Stability Index (see chart below) is clearly in an uptrend again, after bottoming in the fourth quarter of last year. The trend has been boosted by gains in Chinese stocks, tighter monetary conditions and a slowdown in capital outflows from China.
In other words, the worst is over already and Moody’s is late to the party … again!
Second, another reason so-called experts get it wrong with China is that they forget how the Red Dragon funds the vast majority of its debt internally. State-run companies within China hold most government and corporate debt.
That’s why a credit downgrade isn’t about to trigger a wave of bond selling, because Beijing simply won’t allow it to happen.
China’s total external debt – that is, held by investors outside of China – is just a tiny 13% of GDP, a very low level compared to many other nations. For example, Japan’s external debt equals 74% of its GDP while in the U.S. it’s 97%! Meanwhile, foreigners own just 3% of China’s debt.
Has your investment portfolio or retirement account seen average gains of 25% over the past five years? Most people haven’t.
However, we recently invited our readers to investigate our newest investment platform called Quantum Trader. It has shown an average of 29.24% gains each year… for the past 11 years.
Imagine generating positive gains for the past 11 years in a row… even in year like 2008 when most investors were losing over 30% or more of their retirement portfolios. Well now you can…
CLICK HERE TO check out the impressive track record
Third, still if you want to pick on China for its growing liabilities, then at least be fair enough to look at the asset side of its financial statement. The fact is, China saves almost 45% of GDP, far and away the highest savings rate of any large economy on earth.
This means China doesn’t need to borrow from foreigners, it can fund its economic growth internally. It’s self-sufficient, so a credit rating downgrade won’t phase China’s financial markets in the slightest.
And sure enough, the iShares China Large-Cap ETF (FXI), which is the largest ETF tracking Chinese stocks, is up 18% year-to-date, far ahead of the 6.5% gain for the Dow so far this year.
Bottom line: Chinese stocks have enjoyed nice gains so far this year, and members of my Real Wealth Report have profited nicely thanks to FXI and several other timely recommendations.
That said, I wouldn’t be a bit surprised to see a pullback at some point soon, probably triggered by a correction in U.S. stocks. But I would view any pullback as a great buying opportunity in China, regardless of Moody’s downgrade.
Remember, the U.S. suffered a credit-rating downgrade in 2011, which the talking heads on CNBC said was the beginning of the end for our stock market. The reality is, the Dow has more than doubled in value since then.
Good investing,
Mike Burnick
Mike BurnickMike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.

2 comments:

Dr Purva Pius said...

Hello Everybody,
My name is Mrs Sharon Sim. I live in Singapore and i am a happy woman today? and i told my self that any lender that rescue my family from our poor situation, i will refer any person that is looking for loan to him, he gave me happiness to me and my family, i was in need of a loan of S$250,000.00 to start my life all over as i am a single mother with 3 kids I met this honest and GOD fearing man loan lender that help me with a loan of S$250,000.00 SG. Dollar, he is a GOD fearing man, if you are in need of loan and you will pay back the loan please contact him tell him that is Mrs Sharon, that refer you to him. contact Dr Purva Pius,via email:{PurvaPius22@gmail.com} Thank you.

Dr Purva Pius said...

Do you need a loan to pay off your bill or in need of financial help with a loan you can contact us now for a loan if you are serious in getting it surely we will help you out via Email {urgentloan22@gmail.com}