June, 02 2016 by lsr team

China’s rebalancing started only in 2015, with recent numbers showing significant progress in rebalancing from excessive saving and capex towards more consumer spending. Capex in 2015 fell by 1.8% of GDP, while gross savings dropped by 1%. This is the first concrete evidence of genuine rebalancing, but still remains small in relation to what is needed. Our Chief Economist, Charles Dumas explains how further rebalancing can be achieved through explicit yuan devaluation against the dollar and other major currencies. Click above to watch the full video. &...

May, 12 2016 by lsr team

Following a surge in new loans earlier this year, investors are concerned again about the sustainability of China’s debt. Severe producer price deflation and decimated profits show just how unproductive investment has been. The good news is that China’s total non-financial debt is still low compared to most advanced countries. However, China’s refusal to tackle zombie companies has caused a massive slowdown in productivity, compromising China’s ability to grow its way out of the debt problem…

April, 29 2016 by lsr team

Investor sentiment has started to perk up recently on the back of a series of strong data. On our preliminary estimate, Chinese GDP expanded 7.1% at an annualised rate in Q1. That is up from 5.5% in Q4 and is the fastest pace in almost two years. China’s economy has re-gained strength thanks to Beijing’s orchestrated policy stimulus. But how much longer can Beijing go on creating debt at a breakneck pace to generate growth? Click above to watch the full video.

February, 17 2016 by lsr team

Beijing has pledged to embark on the necessary reforms to lower debt levels in the economy. Yet the latest money and credit numbers show that Chinese banks expanded their loan books at a record pace at the start of 2016. In January, Chinese banks extended a whopping RMB2.5 trillion in new loans, or 4% of GDP. On a seasonally adjusted basis, RMB 1.6 trillion new loans were extended. Given that local government bond issuance has come to a halt ahead of a new debt swap programme, local government financing companies might have taken out bridge loans from banks to refinance...

January, 18 2016 by lsr team

The majority of investors have consistently been behind the curve on our Chinese slowdown story. Coming to terms with a series of negative surprises has led most to turn bearish on the global economy just as China’s leaders have actually taken the right policy steps. The bizarre expectation that Beijing could somehow engineer a difficult economic adjustment smoothly has inevitably disappointed investors, reinforcing their worries. Unfortunately, because of the huge obstacles in the way of a successful transition, the risk of an unnecessary economic crisis will grow if...

November, 24 2015 by lsr team

Beginning in the early 1970s, Japan embarked on a long quest to reform its financial sector. Liberalisation in one area brought unintended consequences in others. Excessive leverage and regulations that failed to keep up with changes inevitably led to a crisis. Today, China has come to a point where financial reform is critical. While China does not have Japan’s luxury to pursue financial reform gradually, Japan’s experience however could shed some light. We visit Japan’s story and look at its implications and what China could do to avoid Japan’s...

November, 18 2015 by lsr team

Last week we summarised the first panel discussion of our recent conference in New York, “The New Abnormal: American monetary policy and China’s liberalisation”. The second panel addressed the question of whether China’s financial transformation would be “a boon or a curse for the world economy”. LSR’s own Diana Choyleva was joined by Chinese political analyst TL Tsim and Fraser Howie, co-author of “Red Capitalism”. The panellists agreed that the process of financial market reform had reached a critical point, exempli...

October, 12 2015 by lsr team

Over the past three years, Beijing under the leadership of Xi Jinping has changed the direction of its economic policy decisively. Alone among the world’s major savers, China has embarked on necessary but painful reforms rather than opt for competitive devaluation. Despite much weaker growth, overall policy has been tight. By Chinese standards, progress on financial liberalisation has been swift. However, the ultimate success of China’s policy drive will depend on three big IFs. To find out more about whether China will be able to rebalance and help the globa...

September, 10 2015 by lsr team

A weaker currency is good news for overvalued and overinvested China, but a collapsing yuan will be a disaster for all. According to data from the Bank for International Settlements, international bank claims on China fell by $120 billion in the three quarters to Q1 2015. The past five quarters have also seen record-high net capital outflows of $440 billion. Capital flight has intensified after Beijing announced that it will allow its currency to be driven by market forces, starting with an initial 1.9% depreciation on the 11th of August. So far the authorities have allo...

September, 08 2015 by lsr team

China’s economic transformation is a game-changer for the world economy. Recent market jitters have shown that investors have now begun to acknowledge the sharp growth slowdown we forecast. Yet confusion and uncertainty abound as most regard China’s economy and politics a black box. China’s equity market crash, the authorities’ panic intervention and the growth slowdown have undermined confidence in China’s economy and policymaking. But it seems investors’ own fear is now preventing them from seeing the big picture and important change...

August, 10 2015 by lsr team

China’s overall monetary conditions have been kept tight for some time now with broad money growth - the best indicator of overall monetary conditions in an economy, slowing to its lowest rate on record in recent months. Despite the introduction of new monetary policy tools – SLO, SLF, MLF, PSL, etc by the People’s Bank of China over the past few years, liquidity injection through these facilities has not been large. Meanwhile, real lending rates are high and capital is flowing out of the country. While many have argued that China is witnessing capital...

July, 24 2015 by lsr team

In his latest round-the-world trip over the past couple of weeks, our Chairman, Charles Dumas visited Beijing, Shanghai, Los Angeles, Portland, Seattle and San Francisco. A frequently recurring question was how the current US recovery might be blighted by huge Chinese adjustments, just when it appears to be getting properly established. He remains bullish on US stocks for the next year or so but is warning that we expect Chinese problems and USD strength to hamper stocks in the medium-term.    Click below to find out more about Charles’ latest views on th...

July, 20 2015 by lsr team

While China’s official Q2 real GDP growth beat market expectations, our estimates showed that the economy expanded at an even stronger pace in Q2 with real GDP growing at a quarterly annualised rate of 7.3%.  But the economy is far from staging a decisive turnaround. The equity market collapse will reverberate throughout the economy in H2 and consequently threatens to derail reforms. Our central muddle-through scenario is for growth of around 4-5%, with risks on the downside. To find out more on why we think China’s growth is unlikely to rebound and...

July, 06 2015 by lsr team

The People’s Bank of China (PBoC) simultaneously cut its benchmark lending rate and reserve requirement ratio a week ago in response to the country’s slowing economy and sharp fluctuations in the stock market. This is no surprise to us as we’ve been expecting the PBoC to keep easing policy through further lending rate cuts, more mortgage credit easing, implicit support for the equity market and sharp RRR reductions to help with the cleansing of banks’ balance sheets. According to our estimates, China’s real GDP fell 0.2% in Q1...

July, 02 2015 by lsr team

All eyes are on the unfolding Greek drama, yet arguably what is going on in China is of equal if not greater importance for markets. China’s stock market has the blessing of the ruling Communist party, but this doesn’t mean equity prices can’t swing violently. Beijing would rather see money pouring into shares than inflating a new property bubble that could burst with potentially more severe social consequences. Yet it does not want a re-run of the market’s collapse in 2008 either – hence the recent crackdown on margin trading that set off t...

June, 22 2015 by lsr team

China’s economy is losing steam fast under the burden of local government and corporate debt. According to our estimates, non-financial debt including shadow banking reached 240% of GDP in 2014, while real GDP growth averaged just under 5%. Beijing’s local government debt bailout plan buys time, but we estimate that a proper clean-up could mean government debt rising to as high as 105% of GDP. Click below for our exclusive report on ‘’Defusing China’s debt bomb” to find out if Beijing can afford to clean up past excesses, whether its d...