Should China be our next worry?
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At the start of 2012, the market is still worried about developments over Greece's sovereign debt.
The problem is back to haunt us again this year, with the debt repayment deadline of March 20 looming. Greece badly needs the euro zone’s support help to repay its debt but the so-called troika of the International Monetary Fund, European Commission and European Central Bank, backed by EU giants like Germany, is demanding Greece cut its budget deficit. Market players are optimistic about the outcome and expect that Greece will eventually agree to austerity measures and the euro zone will again outstretch a helping hand.
The euro dropped as low as US$1.26 late last year and has bounced back to $1.32 as the market awaits the final outcome of the new rescue package. However, uncertainties remain given the fact that the troika has not accepted Greece’s latest austerity measures. EU finance ministers met last night to decide on whether Greece had done enough to merit a second bail-out package, of a further ¤130 billion (Bt5.27 trillion). On the other side, Greece’s opposition party vowed that they would not honour any agreement made by a previous government if they won the election in April.
Last year, besides the euro-zone debt crisis, we had the US debt problem to deal with. Preoccupied with these two factors, the world market tended to overlook significant economic developments in China. There were a number of economic indicators
that should catch our attention.
First came signs of a property market bubble in China.
Second, China has been hit by the economic slump in the EU.
Lastly, China’s public debt is higher than we thought. If the troubled euro-zone countries are registering sovereign debt of over 100 per cent of GDP, China is not far behind. Some estimate that Chinese public debt was about 82 per cent of GDP in 2010 (central government and local government), but the public debt of central government alone stood at 17 per cent of GDP. On these figures, total public debt is not low. It may be necessary for the central government to pump in more expenditure to keep the economy going.
Given these factors, economists have begun predicting a bubble-burst soon for China. Some are forecasting a hard landing for the economy, others a soft landing. The hard landing would see financial problems from non-performing property loans – a repeat of the 1997 crisis. Those who foresee a soft landing believe that, with its debt still low, China’s central government could inject fresh capital to support banks and increase government spending to support the economy. One positive point is that China’s public debt is mainly domestic. It has little offshore debt. Therefore, we would not expect the yuan to weaken deeply and rapidly against other currencies. Whichever forecast is right, the certainty is that with China we now have another factor to worry about.
China is one of our major trading partners. If its economy slows down, it will definitely buy less from us. We all want to see a solution for Greece and the EU debt problems, plus a soft landing in China. However, we should prepare ourselves for a possible deadlock which would see Greece default on its debt, and then China suffer that hard landing.
Padej Piroonsit is head of Treasury Sales at CIMB Thai Bank. Views expressed are the writer’s own.
