How The Chinese Economy Debt Bubble Will Impact Your Investments
Sasha Cekerevac: I’ve always been a fan of long-term investing, as it allows big picture thinking to be more important than short-term gyrations. One of my concerns when it comes to developing a long-term investing portfolio is the Chinese economy (NYSEARCA:FXI).
Over the last 10 years, we’ve seen the Chinese economy take a greater role in the global economy. As readers who follow the markets closely already know, any news of economic growth or contraction within the Chinese economy now has the potential to move markets around the world.
This makes long-term investing more difficult, as we have to move beyond simply looking at a company’s potential to including the underlying fundamentals of the Chinese economy.
One of the red flags that concerns me is the massive increase in debt within the Chinese economy. I believe that non-performing debt, especially within the local governments of China, could cause a serious issue, not only for the Chinese economy, but the global economy as well.
Another nation that took on a massive level of debt was Japan during the 1980s. As we all know, anyone who takes out a large amount of debt needs to pay it back, which usually involves reducing spending and hunkering down to pay the large bill, or as I like to call it, the “hangover effect.”
While hard statistics are difficult to come by, I believe that local government debt within the Chinese economy has risen by approximately 50% over the last five years. The impact when it comes to long-term investing even here in America could be dramatic if this were to suddenly cause the global economy to slow down.
It does appear that the leaders in China are trying to prevent the growth of debt from completely swallowing the nation. Much like investors interested in long-term investing were heavily bullish on Japan during their growth spurt in the 1980s, the impact of deleveraging has taken decades to work out and they’re still struggling with a lack of economic growth.