China update... and its not all good

China's financial system has had its problems in recent years.  2013:  funding cash crunch. 2014: shadow banking defaults.  2015:  stockmarket collapse.  2016:  surging capital flight depleting reserves.  According to the Economist Chinese debt has surged from 155% of GDP in 2008 to 260% by the end of 2015.  That is a staggering borrowing frenzy.

Its banking system is the world's largest with over $30 trillion of assets.  Its 4 largest banks are also the world's 4 largest banks. It has the second biggest stockmarket (behind the US) and the third biggest bond market (behind the US and Japan).  What happens in China really matters for financial stability elsewhere in the world.

China has issues - it is failing to enact many key reforms.  Its demographics are a big problem (aging population and shrinking workforce).  According to the Economist many observers now believe China is set to follow the chronic malaise of the Japanese economy.  For China this would be a disaster - when Japanese growth stagnated its income levels were close to those of the US - meanwhile Chinese incomes are only a quarter of the US.  It would be a bad time for China's growth to splutter and stop.  

What does this mean for markets and investors?  Emerging markets are rebounding over 2016 - up 10% in local currency terms to end of July.  Yet China has lagged with a 0% return YTD.  Compare this to Brazil (+32%), Russia (+24%), Taiwan (+13%) and India (+9%).   China is struggling and investors are recognising this by looking elsewhere in emerging markets.

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