Tuesday, 8 September 2015

Do China's assets protect it from financial crisis?

Malcolm Scott at Bloomberg wrote that according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen, as of 2013, total assets in China were about 900 percent of gross domestic product, versus debt of about 220 percent.

"On that score, China's balance sheet looks a lot rosier, suggesting prospects for 'financial Armageddon' may be overblown," he wrote.

However, Scott wrote that Orlik and Chen also noted that strong assets don't mean China is immune to a crisis. "It's likely that prices are inflated, and when confidence evaporates, everything from houses to stocks and land can be hard to sell," he wrote.

Indeed, high asset values are often fuelled by credit growth and may be a reflection of the debt problem rather than a mitigating factor.

A recent paper by Oscar Jorda of the Federal Reserve Bank of San Francisco, Moritz Schularick of the University of Bonn, and Alan M. Taylor of the University of California-Davis concluded that "when credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial" and that "the damage done to the economy by the bursting of credit-boom bubbles is significant and long-lasting".

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