Feast Today Famine Tomorrow
The sum and substance of China’s impressive growth in recent decades has been a bustle about business. On top of around five million new small and medium-size enterprises (SMEs) started each year by the wealthy and well-educated, huge growth is expected of the country’s state-owned sectoral giants. It’s no big deal, really, but what is a big deal is how much of that investment is made with borrowed yuan!
Three credit rating agencies, Moody’s, Standard and Poor’s, and to some extent, Fitch, are critical to the global economy. They peek behind the curtains of countries and companies to work out how likely they are to pay their debts, and while they don’t make promises, they do assign scores!
Triple-A rated firms default on fewer than 1% their ten-year loans. “Junk” C-graders, however, leave investors out of pocket on more than half of occasions. Chief Economist at Moody’s, Mark Zandi, was recently asked behind which curtains he thought the biggest global debt-related crises could be hiding. He pointed straight at China!
As a “fault line in the financial system,” private Chinese companies have failed to pay their dues at record rates in 2019. If one rating agency was to downgrade the world’s second-largest economy from its A-grade standing, a shock to confidence would immediately hit public stock markets. Go carefully, fellow investors!