Moneycontrol
Feb 04, 2016 08:03 AM IST | Source: CNBC-TV18

China replicating its own 2008 market situation: Rabobank

High debt levels is the major problem in China, which may create a situation similar to that of 2008, says Jan Lambregts of Rabobank.


The global equity markets may not stop bleeding as there still remains a significant downward scope for them, says Jan Lambregts of Rabobank. Speaking to CNBC-TV18, Lambregts says this is being directed by a lagging Chinese economy which may be even slower than expected.

High debt levels is the major problem in China, which may create a situation similar to that of 2008, he says, adding, Shanghai Composite Index may fall below 2000, going forward.

Below is the verbatim transcript of Jan Lambregts’ interview

Latha: We just had the Indian Reserve Bank governor explaining to us in Hindi that the fear for the market is from China and it is a huge USD 15 trillion debt, some of which could go bad as well the Chinese slowing economy. But, this fear has been discounted enough. How much more can we see equity markets and risk assets bleed?


A: I think there is still quite a bit of downward scope here. If look at 2007-2008, we had exactly the same time of boom going bust in the stock markets in China and then we had a 70 percent correction. So, if you take that as a lead, then Chinese equities can still go down to the low 2,000s, 2,500s maybe in a more optimistic scenario. So, there is still further downside and it is absolutely spot on, the debt is a problem in China. The overall problem of debt is perhaps less of a concern as in a lot of countries are more indebted, but China being essentially an emerging market still, it is at a high level and the delta here, the change year-on-year is massively important. China’s growth model currently relies on borrowing money investing that in infrastructure and hoping there is a sufficient return. While the debt is rising, the sufficient return is no longer there. It is really diminishing. We have marginal returns here that are far lower and that is a real problem, you need to get to a new growth model, but that is easier said than done.


Anuj: How bad could things get? Could this be 2008 being repeated, could this be worse that 2008?


A: If you mean 2008 is in terms of global financial crisis I don't particularly think that China by itself is going to achieve that. The rest of the world is paying attention and the rest of the world is paying attention not so much because China's equity markets are important to the rest of the world. They are not, because they are not even linked to the rest of the world.


The rest of the world is mainly paying attention, clients are asking this question constantly to me and I agree that it is isolated in a way but it is not isolated if you have been a China optimist. If you are a China optimist you probably believe Chinese policy makers are somehow superior to other policy makers across the globe. I don't believe that is the case but to the extent that some people have been expecting that the dent in the trust that they are seeing in the mishandling of stock market boom going bust. Remember they had this in 2007-2008 and the are doing it all again. That is denting some of the trust and it is fuelling worries that China's growth may slow down more and maybe slower than people expect. Of course China being the margin of demand many of these markets including commodities and energy that is then getting quite a bit of tension especially in a world where there is very little growth to focus on.


Latha: Just to take attention away from the China for the global risk assets equity class, how much more downside do you think will not surprise you?

A: There I think it is a bit more limited and the reason it is more limited is that like we have seen in previous years, we still have the central banks out there back stopping us essentially and you can see there were gongs between that. What has really happened is that over the past couple of years, a wedge has been driven into these markets. If you look at equity and bond market returns, they would normally move in tandem, but if you plot them now, you will see the stock prices are still even after correction this year, much higher than bond yields. That wedge somewhat has to be correct. Either central banks continue to pump money in and the rest can be retained for a couple of years or stock markets crash and come down or essentially, we have a fundamental recovery and bond yields go up. I think the first scenario, central banks keeping that wedge in there for a while. It is most likely and of course, the latest corporate to join the party there was the Bank of Japan.

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