VIDEO: One third of China is already in recession

You can watch him share his insights in the video below, or read the transcript.

"If [China] can have a smooth transition, the bad debt can be managed and controlled. But if there is a bit of shock, it could potentially be a bigger issue."
Minggao Shen, CEBM/Caxin Insight Group chief economist

Simone Stella: As someone who lives, works and breathes China almost on a daily basis, can you please talk to us about some of the mid-term things you think will play out over there in the coming months?

Minggao Shen: Well, China is in transition. We are transitioning from the old economy to the new economy. But that takes time.

In my view, one third of the Chinese economy, which is the old economy, is in recession. About another third which is the new economy, that’s still growing at double digits. The rest is in between.

So in that sense, the transition will continue, as the old economy adjusts downwards and the new economy becomes bigger and eventually offset the downside risk of the Chinese economy.  

The transition itself is not an easy move. It means more bad loans in the old economy, it means layoffs, and it means a painful adjustment for workers.

SS: We’ve seen a lot recently in the press about China’s supposed bad debt. Can you provide us with some of your thoughts on this?

MS: China’s bad debt is mostly arising from the old economy. So the old economy had a strategy in the past, for a few decades, of a high-leverage ratio, heavy assets.

So in the near future when the financial market adjusts, there is a chance that the actual cost of funding will rise and heavy assets will become a bigger burden.

So there is a risk if there is a credit crunch more bad debt will have to take place. It depends how the Chinese authorities mange the economy.

If they can have a smooth transition, the bad debt can be managed and controlled. But if there is a bit of shock, it could potentially be a bigger issue.

SS: So what kind of impact will a slowing Chinese economy have on regional and global economies?

MS: I see three things. Firstly I think it’s about confidence. China’s growth is about one third of global growth.  If China slows, global investors worry about the economy being affected.

Secondly, China’s imports affect the global commodity market. It’s clear when the old economy adjusts, China’s demand for commodities, or resources, will be reduced. That affects commodity-exporting countries.

The last thing is about account flows. Chinese people will have to diversify their portfolios to the rest of the world.  That is actually a positive edition to the financial markets of the rest of the world.

But at the same time, less investment opportunities in China could also mean a slower financial market expansion.

Overall I think given the transition, the key is about the growth momentum, and the longer term trends.  In that sense we are still constructive. But China is undergoing adjustment in the next few years.

SS: Thanks Minggao.

Simone Stella is a contributing editor at BlueNotes