Deutsche Bank analyst who called the Russian default in 1998 says the same is about to happen in ChinaPosted on 23 December 2013 with 4 comments from readers
Senior Deutsche Bank emerging markets analyst John-Paul Smith, who correctly called the 1998 sovereign default by Russia that very few saw coming, now says a similar financial meltdown is about to happen in China. Readers of this website will know that we’ve been of this opinion ever since our two-week tour of China back in April this year and first mentioned this coming over four years ago (click here).
But bearish analysts always look foolish and wrong until they are proven correct, and successful past calls often lead to a certain arrogance on the part of commentators. Take Harry Dent, for example who has not made a single good call in 20 years since getting Japan’s nemesis right (he predicted a massive stock market crash for this year).
On China Jim Chanos, the billionaire hedge fund manager, has been losing money heavily trying to short China for several years. However, it would be wrong to dismiss Oxford-educated Mr. Smith as a crank. He’s been one of the top emerging market analysts of the past 15 years.
His call for a 10 per cent correction in emerging market stocks this year was spot on, only the frontier markets like the UAE have surged ahead. Dubai Financial Market is up an eyewatering 100 per cent.
‘China’s expansion is being fueled by soaring corporate borrowing, a high-risk model that needs to be replaced by the kind of free-market measures and budget cuts that fed Russia’s growth in the aftermath of the country’s default and subsequent 44 percent monthly tumble in the Micex Index’, Mr. Smith told Bloomberg.
Only last week Chinese interbank borrowing costs hit a six-month high. China’s total credit, including shadow banking loans, surged to 190 per cent of GDP at the end of last year from 124 per cent in 2008, according to Fitch. That was faster lending growth than in Japan during the late 1980s or in the US before the financial crisis of 2008.
Mr. Smith argues: ‘It is really at the corporate level and at the micro level in China that the fate of the financial market and the economy there is going to be determined. China is not such a safe haven as most market commentators appear to believe.’
In short we are waiting for a credit event or black swan to occur. It is not hard to imagine that somebody in China is hugely overborrowed and will be pushed over the edge by rising interest rates. How long that will take to happen and whether the government would save them is far less easy to predict.
Mr. Smith’s prediction is a bold one and by sticking his head above the parapit he risks getting it blown off before he is proven right.