Chinese Crisis Gets Priced Into Markets: The Ticker

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By William Pesek

Perhaps investors aren't as complacent about China as previously thought.

In the latest Bloomberg Global Poll, 61 percent of them predicted China will face a banking crisis within the next five years. That hardly means markets are betting on a meltdown. It does, however, suggest a level of negativity we haven't seen in many years. Officials in Beijing would be wise to take the hint.

Over the last decade, the story has been that of the unstoppable China. The place can grow 10 percent forever, it's run by omnipotent geniuses, it's destined to eclipse the West in short order, and anyone who thinks differently is clueless. Now, a critical mass of investors is questioning this narrative.

Does that mean Jim Chanos, the New York hedge manager shorting China, is right? Not necessarily, but it does indicate Asia's biggest economy is entering into a high-risk phase of its development. And ironically, it's one brought on by China's success in steering around the global crisis.

The record 17.6 trillion-yuan ($2.8 trillion) lending boom unleashed by Premier Wen Jiabao in 2009-2010 amid global turmoil is coming back to haunt China. Recent data on manufacturing, home sales and renewed tightening in credit markets raises the stakes and ups the odds of bad-debt crisis.

Investors betting against China don't tend to make lots of money. Yet weak global demand, and the specter or another crisis, is a growing risk to export-driven China. If world growth craters anew, China will find it difficult to maintain the high rates of gross domestic product needed to avoid social instability.

The key to raising living standards is moving away from sweat shops and moving up the value chain to high-end technologies and services. Doing that in the best of times is challenge enough. Doing it while Europe crashes, America walks in place and Japan's deflation deepens is quite another.

The next several years could be decidedly volatile ones for China. Just ask global investors.

(William Pesek is a Bloomberg View columnist.)

-0- Dec/08/2011 19:14 GMT