How likely will there be a hard landing in China?

Here, we provide a preview of HedgeSPA’s newsletter –  HedgeSPA Market Scenarios May 2014.

In our February newsletter, we mentioned that the increasing trend of China’s non-performing loans is expected to persist. The latest data from Huarong, the nation’s largest manager of bad debts, has recently reaffirmed this trend. The worst is far from over as China’s non-performing loan ratio continues to rise for the ninth straight quarter since December 2008.  Just in the first two months of this year, new non-performing loans have amounted to more than $9.6 billion USD.  Chinese Premier Li Keqiang, who is also China’s top economic official, said last week China’s economy is facing “downward pressure” but that the government would not provide short-term stimulus measures.

China’s slowing economy made it more complicated for borrowers to repay debts, and the soaring value of soured loans posed a risk to China’s financial system. That said, it also appears that the probability of a financial crisis in China seems rather remote, so no one is willing to pay up to hedge their positions. Investors appear to have faith that the Chinese government, with roughly $4 trillion USD in foreign exchange reserves, is in full control of the situation.  Although the HedgeSPA team believes that the probability for a Chinese hard landing is remote, there may be rippling implications if the market perceives that to be possible. That could be our next Black Swan.

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HedgeSPA Research Team  – May 2014