A beginning of the end?

In recent weeks the speculation on China has been all negative. Apparently the Chinese Prime Minister, Li Keqiang confessed at the World Economic Forum in Davos in January that the economy is facing strong headwinds and will " continue to pursue a proactive fiscal policy and a prudent monetary policy ". And what are the strong headwinds that China faces? Its growth rate dropped to 7.14% last year and is expected to struggle up to 7% this year. But that is likely to be the highest growth in world and, in absolute terms, a growth of 7% in a $10 trillion economy generates far greater wealth than a 10% growth of the $2 trillion economy of India. So why the panic? There are some structural problems. The combined debt of the government, corporate and household borrowings has reached 250% of GDP. Local governments spend 50% of their borrowing to service previous debts and then have to borrow more for growth. There is a glut of real estate and infrastructure projects, built on loans, which are lying idle. Kaisa Group Holdings, a real estate company, defaulted on repayment of $23 million in January. Courts have frozen some of its accounts. In January, the central bank, the People's Bank of China pumped in 50 billion yuan into banks to stimulate growth by increasing lending, and rolled over loans of 269.5 billion yuan which had matured. The PBOC cut one year borrowing rates by 25 basis points to 5.35% and reduced the cash reserve ratio for banks to stimulate lending. The PBOC is having to support the currency, the yuan, by selling dollars. All these years the central bank bought dollars, building up reserves to $4 trillion, to keep the yuan weak, to support exports, but suddenly there is a reversal of flow so that it is having to support the currency. Why? On the one hand it is loosening monetary policy by cutting the borrowing rate and the cash reserve ratio and on the other it is mopping up yuans, which will lead to tighter liquidity. The crackdown on corruption by the President, Xi Jinping has led to a flight of black money out of the country, leading to financial " uncertainty and instability ". Should India be concerned? Vast amounts of foreign money is coming into our stock and debt markets sending share prices higher into record territory while putting downward pressure on bond yields. While brokers are jubilant and are trying to entice retail investors to invest in stocks the Reserve Bank is concerned at this influx of hot money. Rightly so. Some are predicting the beginning of the end of the Chinese Communist Party. We cannot even guess how that will play out. The disintegration of the Soviet Union was relatively smooth because of Mikhail Gobachev but Xi Jinping may not want to lose power. So will China create wars with its neighbors to unite its people? We hope not. But, for us in India, a complete disintegration of China is surely to pray for. Fingers crossed.