Those higher interest rates in the US
next year could make big problems
for China
Ted Kemp | Fred Imbert
21 Hours Ago
Rising interest rates in the United States have an
obvious effect on the world’s biggest economy — but
less obvious is the impact those rates could have on
the second biggest.
Higher interest rates in the United States could make
it harder for China to manage its exploding debt, as
the Asian giant increasingly depends on borrowing in
order to keep growing — while simultaneously trying
to block capital from fleeing for more fruitful shores
in America.
“If the Federal Reserve [keeps increasing] interest
rates in the United States, the single biggest casualty
of that this time is going to be China, because there’s
so much money just waiting to leave” the country,
said Ruchir Sharma, head of emerging markets and
chief global strategist at Morgan Stanley Investment
Management. Sharma spoke Tuesday evening as
part of a panel at the Asia Society in New York .
“They’re playing whack-a-mole constantly.
They try to bring down one bubble, and
something pops up somewhere else. They do
that, and something comes up somewhere
else.”
-Ruchir Sharma, head of emerging markets, Morgan Stanley
Investment Management
Sharma pointed out that over the last year, China has
moved from one bubble to another: commodities,
stocks and, currently, real estate. That is not a
sustainable way for China to grow, he said, especially
considering that China’s “debt increase over the last
five years has been 60 percentage points as a share
of its economy.”
“They’re playing whack-a-mole constantly. They try to
bring down one bubble, and something pops up
somewhere else. They do that, and something
comes up somewhere else,” said Sharma, who noted
that housing prices in China’s largest cities have
increased between 30 and 50 percent over the last
18 months alone.
Fed officials on Wednesday approved the first U.S.
interest rate increase in a year . The 0.25 percentage
point hike was widely expected, but the more
aggressive pace for future increases outlined by the
Fed — three next year instead of the two that were
previously expected — was not.
Rising U.S. rates typically mean better yields for U.S.
Treasurys and a stronger U.S. dollar. And indeed,
both bond yields and the greenback immediately
moved higher after Wednesday’s announcement.
“I certainly think we could hit a 3 (percent on the 10-
year Treasury yield) by the first quarter” of next year,
Rick Rieder, CIO, global fixed income at BlackRock,
told CNBC on Wednesday. The 10-year was last at 3
percent in January 2014.
Such moves could become trouble for Beijing, which
is already working hard to block capital from fleeing
China as its currency, the yuan, declines in value
against the dollar. More appealing investment
options in the United States are a powerful lure
drawing money out of China. (China also is using its
foreign currency reserves to buy up yuan in a
desperate attempt to keep its currency from
plunging.)
Others doubt Sharma’s take on China’s economy.
More optimistic observers of the country correctly
point out that the country’s debt is fundamentally
different from debt in most other places. The
government in China has so much control over so
much of the economy, and a direct stake in so many
markets and businesses in China, that it has proven
capable of engineering its way out of previous
bubbles.
But the ability to keep financing its “massive debt
binge” is impaired, Sharma said, if too much money
bleeds out of the system. And China needs a lot of
money — and more and more of it — to keep hitting
the largely arbitrary 6-percent GDP growth rate that
Beijing has mandated for the country.
“Today in China, it’s taking $4 in debt to create a
dollar of GDP growth,” said Sharma, who is also the
author of “The Rise and Fall of Nations: Forces of
Change in a Post-Crisis World.”
Sharma isn’t alone among economists and market
watchers who are looking at China with rising
concern.
Peter Boockvar, chief market analyst at economic
advisory firm The Lindsey Group, said in a
Wednesday note that China “is headed to debt
outstanding as a percent of GDP to north of 250% vs
163% in 2008,” citing sharp increases in consumer
and banking debt within the country.
Christopher Goodney | Bloomberg | Getty Images
Ruchir Sharma of Morgan Stanley Investment Management
On Wednesday, the Chinese government said it
issued 794.6 billion yuan ($115.1 billion) in new
loans last month, well above October’s 651 billion
yuan ($94.28 billion).
Meanwhile, total social financing in China, a broad
measure of credit in the country, rose to 1.74 trillion
yuan ($250 billion) in November, from 896.3 billion
($129.8 billion) in October.
“This is out of control, as this is happening at the
same time their growth rate is in secular decline,”
Boockvar said.
China’s GDP growth rate has steadily dropped since
2010, when China’s economy grew nearly 10 percent,
according to data from the International Monetary
Fund.
—CNBC’s Patti Domm contributed to this report.
Christopher Goodney | Bloomberg | Getty Images
Ruchir Sharma of Morgan Stanley Investment Management
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