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There Are Things China Pessimists Just Can’t See

CICC researchers say upside factors for growth aren’t fully appreciated
Inside The Singamas Container Factory
Photographer: Bloomberg/Bloomberg

China has defied the doomsayers again, with a solid 6.8 percent expansion in the third quarter. Now signs are emerging that it’s set for the first full-year growth acceleration since 2010. 

That ought to have surprised a few perennial China pessimists, such as hedge fund manager Kyle Bass, who has warned about the nation’s debt pile and foretold a collapse of the currency. Predictions like that have been going a while though, and they haven’t turned into reality, yet.

In fact, China's bond market provides evidence for the argument that the economy's strength has caught some people by surprise, with the benchmark 10-year notes headed for the worst month since January amid reduced demand for the safety of government debt.

China International Capital Corp. on Monday helpfully detailed a few points that Bass and others may have missed.

“At the beginning of 2016, there were widespread concerns circulating in the market about an imminent credit bubble bursting, substantial renminbi devaluation, and a severe slowdown in economic activity,” CICC’s Hong Liang wrote in a research note. “Despite the prevalence of these concerns, they have proven to be misplaced.”

Here are the highlights: 

Generally seen as the No.1 risk factor facing the economy, China’s total borrowing has risen to about 260 percent of annual output. CICC argues though that both the state sector and households have more than enough cash on hand should trouble strike. What’s more, the most indebted sector, corporates, sits on cash equivalent to about 40 percent of current debt. 

That, according to Liang, means that while reforms to cut debt levels in China are important, those needn’t be “growth negative.” Some of that cash pile can be put to use enhancing efficiency, she says.