Michael Pettis is a former investment banker and currently a professor of finance at the Peking University. In the most recent edition of Bloomberg’s Odd Lots podcast, the professor provided a description of China’s debt issues that Canadians can apply to their deliberations ahead of our national election.
Mr. Pettis explained that China is attempting to reorient its economy from investment-oriented to consumption-driven. The investment model was highly effective in generating gross domestic product growth in the 1980s and 1990s because China was under-invested.
The under-invested stage meant that hypothetically, business owners could borrow $100, invest it and create $110 in economic value. In these cases, the aggregate debt level rises, but the capacity to repay debt rises by 10 per cent.
The problem now, according to Mr. Pettis, is that a saturation point has been reached where $100 investments only create $20 in value. At this point, Chinese debt levels are exploding, but the unprofitable nature of recent investment means the economy’s debt burden is rapidly becoming unserviceable.
There are major structural differences between China’s economy and our own. Most importantly, Canada is already a modern, consumption-centric economy. Household debt levels are high, but anything resembling the gargantuan scale of China’s malinvestment is not evident.
Despite these economic distinctions, I don’t think Canadians can afford to fully ignore Mr. Pettis’ warnings for China as the federal election approaches. Sizeable budget deficits are expected no matter who wins on October 21, and the Liberals new spending initiatives are estimated to cost almost $30-billion annually according to the Globe and Mail’s Campbell Clark.
My point is certainly NOT that government spending is bad. In the past, I’ve featured the work of economists like Carlota Perez from the London School of Economics and University College London’s Mariana Mazzucato, who argue that the current era of technological proliferation requires more government intervention and safety nets for displaced workers.
Ideally, government spending should be focused in areas – education and infrastructure are the two most obvious - that provide benefits and financial returns over time frames longer than any private company is willing to wait. But they still, as Mr. Pettis emphasizes, need to eventually generate $110 in economic value for every $100 spent in aggregate or risk a general decline in standards of living. Canadians should keep this in mind as they head to the polls.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
WPT Industrial Real Estate Investment Trust This REIT closed at a record high on Friday and is uniquely positioned in its business, providing investors with exposure to the U.S. industrial market. Among its top tenants are well-known companies including General Mills, Unilever, Amazon, and Zulily. The REIT pays its unitholders a stable monthly dividend denominated in U.S. dollars. Jennifer Dowty profiles the REIT.
The Rundown
Sanity is seeping back into markets. And that could be a very good thing
From pot stocks and bitcoin to big U.S. IPOs, Fantasies are fading in many pockets of the market. The shift away from speculative investments can be read as a verdict on a slowing global economy. Look anywhere and you see evidence that smart money is growing skittish. Ian McGugan reports
Stock market shakeout: Big investors now shun the growth-at-all-costs model
For years, ambitious companies coming to market were rewarded for growth at all costs. But now, institutional money managers have started to demand positive cash flow and a visible path to profits – and these businesses struggle to show it. Tim Kiladze reports
The Globe’s guide for matching your ETFs to the right type of account to save on tax
Presenting the Globe and Mail’s ETF Tax Primer, aimed at helping you find the best possible home for your ETF. Designed to be used with The Globe’s ETF Buyer’s Guide, it outlines the tax implications of investing in bond funds and Canadian, U.S. and international equity funds in a TFSA, a registered retirement savings plan or registered retirement income fund, or a taxable account.
Others (for subscribers)
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Two stocks yielding over 4% with buying action
Stocks out of favour again as global funds prefer bonds in September: poll
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What’s up in the days ahead
Remember that little old stock called Nutrien (a.k.a. Potash Corp. of Saskatchewan)? David Berman sure does, and he’ll report on what the company has been up to - and why it might be a good time to consider it for your portfolio.
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