Deltec's Think About This Big Trouble in Little China? | Page 3

Think About This
INVESTMENT RESEARCH
But where does this money go? Where do we see
the effects in the underlying economy? The answer
is that this impulse is reviving the old model:
debt-fueled fixed-asset investment. Over the last 3
months there has been a major bounce in fixed
asset investment; stimulus manifests in economic
data such as industrial production, infrastructure
spend and commodity consumption. As we have
said before, we think this source of growth is
unsustainable. It increases loss-making capacity
and excess capital stock, driving down returns on
capital. This model builds up bad debts in the
future. These bad debts are effectively funded by
Chinese savers or will require government bailouts
when they inevitably go sour. So the benefits of
this wave are temporary.
Regardless, for the time being this activity and
growth will drive a rebound in the headline data.
And this is encouraging speculation. Perhaps in
order to deflect from the Coronavirus and news of
repression in Hong Kong, China is reinforcing
positive economic stories through state-owned
media outlets. Taking their cue from the
government, investors are borrowing money to
speculate on the market, and margin debt at
stockbrokers has expanded to 1.4 trillion Yuan
($200 billion), the most in 5 years. From its low in
March, the Chinese local market is up 41%, and last
week rose 7% adding $1 trillion in value!
CHINESE MARGIN TRADING vs. SHANGHAI SHENZEN CSI 300 INDEX
RMB Billion
2,500
2,000
1,500
1,000
500
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
0 1,500
2013 2014 2015 2016 2017 2018 2019 2020
Index
China Margin Trading — Total Outstanding Balance of Margin Transactions (left)
Shanghai Shenzhen CSI 300 Index (right)
Sources: Bloomberg, Deltec
SHANGHAI COMPOSITE vs. iSHARES CHINA LARGE-CAP ETF
6,000
60
55
5,000
50
4,000
45
40
3,000
35
2,000
30
25
1,000 20
2013 2014 2015 2016 2017 2018 2019 2020
Shanghai Composite Index (left)
iShares China Large-Cap ETF (right)
Sources: Bloomberg, Deltec
www.deltecbank.com
Deltec Bank & Trust Limited