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TREND 4: China and its debt bubbles

What do the 2020s have in store for investors? Big-picture thinker David Dowsett sets out the ten trends he foresees emerging over the next decade, along with their investment implications.

TREND 4: China and its debt bubbles

In its efforts to keep growth on track, China has created simultaneous and interlinked debt bubbles in the state-owned enterprises, local government finances, the shadow banking sector and the real estate market.

The statistic that Chinese debt has doubled over the past decade to over 250% of GDP is a familiar one.

How the Chinese authorities manage these bubbles is crucial to the future of the Communist Party, global economic demand and regional security.

The development of the new digital economy in China and the fact that the debt stock is financed internally gives China a chance of growing its way out of its debt load.

The middle-income population should double from 400 million to 800 million in the next decade, which in turn should be a continual source of domestic demand.

However, the tightrope the Chinese authorities have to walk is still narrow – it is the very definition of an unstable equilibrium.

Corporate defaults are likely to rise but still need to be carefully managed. Aggressive reform is very unlikely, financial stability will remain key.

Any mistakes will be felt throughout the global economy; China generated 40% of all global growth over the past decade.

In my view, a China which is floundering in dealing with its debt issues is also more likely to divert domestic attention with foreign policy adventurism. The boundaries in the South China Sea and the issue of Taiwan are still unresolved in the minds of the Chinese Communist Party.

Paradoxically, I believe the risks of a Thucydides trap are higher if China is weak rather than strong.

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