Fama and french 5 factor model
The storm beneath the peace
Its currency, the renminbi, remains stable; its economic growth, though slowing down, is expected to reach 7 percent this year, the fastest among major economies.
But appearances are deceiving. Behind these statistics lies a far more fragile Chinese economic reality. The relative calm of the Chinese economy actually conceals far greater risks.
The biggest short-term risk is financial overleveraging. Thanks to its decade-long credit boom, the Chinese economy as a whole is far more leveraged (indebted) than any of the major emerging market economies. Net domestic credit as a share of GDP is close to 140 percent in China, compared with roughly 90 for Brazil, 75 for India, 60 for Turkey, and 35 for Indonesia. To make matters worse, most of the debt is owed by state-owned companies, real estate developers, and local governments that are known for wasting capital on financially unprofitable investments. How these credit is hidden from the eyes of the world
For now, the bad debts incurred by these borrowers are not recognized on the balance sheet of Chinese banks, which are ordered by the Chinese government to roll over these loans. Estimates of bad loans hidden in Chinese banks vary, due to the opacity of the Chinese financial system. The most conservative estimates suggest they are around 10 percent to 15 percent of GDP. If that is true, the Chinese banking system is technically insolvent.
Thanks to its capital control and state ownership of banks, China does not face an imminent financial meltdown (since the government can maintain liquidity), but Chinese banks will have to be recapitalized at some point – an expensive, time-consuming and technically complex process that will have a substantial negative impact on future growth.
Even if Beijing manages, through a combination of inflation and clever accounting gimmicks (such as shifting bad loans to off-balance sheet financial entities), to make its banks healthy again, it has to
Its currency, the renminbi, remains stable; its economic growth, though slowing down, is expected to reach 7 percent this year, the fastest among major economies.
But appearances are deceiving. Behind these statistics lies a far more fragile Chinese economic reality. The relative calm of the Chinese economy actually conceals far greater risks.
The biggest short-term risk is financial overleveraging. Thanks to its decade-long credit boom, the Chinese economy as a whole is far more leveraged (indebted) than any of the major emerging market economies. Net domestic credit as a share of GDP is close to 140 percent in China, compared with roughly 90 for Brazil, 75 for India, 60 for Turkey, and 35 for Indonesia. To make matters worse, most of the debt is owed by state-owned companies, real estate developers, and local governments that are known for wasting capital on financially unprofitable investments. How these credit is hidden from the eyes of the world
For now, the bad debts incurred by these borrowers are not recognized on the balance sheet of Chinese banks, which are ordered by the Chinese government to roll over these loans. Estimates of bad loans hidden in Chinese banks vary, due to the opacity of the Chinese financial system. The most conservative estimates suggest they are around 10 percent to 15 percent of GDP. If that is true, the Chinese banking system is technically insolvent.
Thanks to its capital control and state ownership of banks, China does not face an imminent financial meltdown (since the government can maintain liquidity), but Chinese banks will have to be recapitalized at some point – an expensive, time-consuming and technically complex process that will have a substantial negative impact on future growth.
Even if Beijing manages, through a combination of inflation and clever accounting gimmicks (such as shifting bad loans to off-balance sheet financial entities), to make its banks healthy again, it has to