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Thoughts from the Frontline

Looking at the Middle Kingdom with Fresh Eyes

May 31, 2014

I am writing this introductory note from London during a layover on my way to Rome, and I’ll append a personal ending tonight after I finally make my way back from dinner to the hotel.

One of the few consensus ideas that I took away from the Strategic Investment Conference is that China has the potential to become a real problem. It seemed to me that almost everyone who addressed the topic was either seriously alarmed at the extent of China’s troubles or merely very worried. Perhaps it was the particular group of speakers we had, but no one was sanguine. If you recall, a few weeks back…

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June 1, 8:25 a.m.

The article exposed but did not make clear (not even acknowledge)
the enormous discrepancy between Dr Lacy Hunt’s Hoisington Investment
Management table showing 420% figure for china Total debt (private
+ Public) to GDP, and the China Beige book chart late in the article
summing up 228,4% for the same.

Of course the last one doesn’t include shadow debt, but then it begs the
question: Hoisington Investment Management figure includes shadow debt?
if so, how they could infer that?  If not, whose numbers are exaggerated/understate here?   

Some minor miscellaneous unsolicited feedback.

Too many emphasis ends up weaking itself.
Percent are not percent Points (about the supposedly increase in china total debt per GDP).

David Smith 34504

June 1, 2:48 a.m.

I am an individual investor.  I attended the SIC this year.  This was my third SIC in a row.  Once again, it was great!  The conference this year has led me to focus more attention to China.  China may be the catalyst for a Minsky moment, but I keep asking myself about timing. When may it happen? 

If the ultimate lender is the Chinese bank, and it is owned by the state, then the state can refuse to recognize bad loans as long as they want to. The Japanese banks seem to have done that in their long downturn. There has been damage to the informal banking system that borrows a lot of money and makes private loans. However, a lot of those seem to be made by people associated with the party/ power structure - so they would have protections unlike anything over here in the west. After the Japanese economy grew so fast in the 60s, we had to wait a long time for a downturn. That may be also true for the Chinese economy. If you approach a downtown and the Chinese want to fight it, they have the largest reserves in the world.

When may a China Minsky moment occur?  It seems that if and when it occurs, it is likely to be a long time in coming, right?

Thank you.  David P. Smith