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Probably of -- Shanghai composite tumble over 5% today following concerns that Beijing.
May be reluctant to ease a liquidity crunch so has the sell -- presented a good -- opportunity.
As a country -- reported deal -- -- with -- that was Eric -- He manages the five star rated clout China -- good to see -- so it's a tough sell on a day like today.
But I have we want to get to exactly where to go in China in terms of good investments.
Guide us through however what it is that that really triggered the spike in interest rates mechanically guide us through how that happened.
Sure they -- me -- so firstly you credit conditions in China than very tight very quickly.
And much more so I think than investors I had expected.
Just some context here all over the last six to nine wants you -- this -- in credit.
Particularly relative to economic growth.
And interestingly most of this sort of -- very -- a lot of this credit came outside of the traditional banking system the so called shadow bank.
Now that's kind of has a pejorative.
Connotation we don't necessarily think it's as it is mysterious says is sometimes play to be.
And in fact that this so called shadow banks and in our eyes are are really precursors to.
The development of capital markets in China which ultimately be very large so when -- talk about capital markets -- talking about.
Corporate bonds for example or even securitization markets like mortgages so.
And so it's not necessarily a shadow banks that are a major problem is just the total credit.
An expansion has been an issue.
He's -- credit growing north of 20% for the better part of last six to nine months.
To high single original nominal -- -- can hear first second and I appreciate your comments about shadow banking because they have been given a bad rap on the other hand if there's a liquidity crisis.
They will suffer and there is concerned that there could be a cascading effect that the whole financial system could implode -- like what happened with Lehman Brothers is that scenario possible in China.
I'd say that the current credit crisis.
On the skill you're matching his is highly unlikely it's gonna remember there's a very high savings -- in China.
And hi deposit base as well -- the banking systems actually very liquid one of the things that.
We should understand about China is that the People's Bank of China has been tight they're trying to slow credit intensive growth in this economic -- -- balancing to focus on the consumer so.
There's there's a metric called required reserve ratio in China.
And that's important because it's it's it's nearly 20% today what that means -- is for every dollar deposit or or -- for deposit twenty cents has to.
Be kept on reserve so it can't support -- asset expansion alone expansion so.
That he's very easily be removed we think ultimately that that you'll see the required reserve -- ratio.
Be tapered lower.
And an international -- supporter I don't think that's -- here's.
Here's the problem America a lot of people who believe -- I I think you do that.
That China is a growing market and that it will be able to be appreciated by investors here because of its internal market as well as -- as well as its exports.
They worry about small businesses getting hit the hardest by credit crunch and we we -- we've seen that happen anywhere in the world if there is a credit crunch it's a small businesses that -- the big businesses they can go abroad they can find your source of funding.
But it's a small -- and if you're relying.
On small business growth to get that internal market going.
This credit crunch could really hurt that now.
Yes it could potentially although I think this pick up a -- on the money markets.
It is is just that I think is if we look past.
The short term and look out another you know it's mark there too I think -- -- pressures will be alleviated.
I think the bigger issues when you think about that in China is probably on the local government side.
There's been a lot of landing too long term infrastructure investments in China that have been funded via the banks.
And you know frankly those are those loses its in this naturally talking about a public asset with with a long term payoff.
And it should not be funded in this manner and I think ultimately -- policy is a central but the central government which actually has a pretty clean balance sheet.
Wolves or a lot of that credit so.
I think in the near term I think there's this from the -- and there is this pressure on a private sector but you know by and large we actually see.
A quite the opposite the private sectors actually see -- cost the capital.
But come down as -- -- balances.
Because the private sector by and large is not really leveraged to the to -- in construction site so -- just a gorgeous.
-- come clear here are you saying that that -- shadow banking that's got a lot of bad press recently.
That could become not only -- survived this particular crisis but it might become sort of the mainstay of the new financial markets in China.
Absolutely the big banks have -- heretofore had difficulty providing credit to the smaller -- -- economy value the private sector.
In the private -- is primarily in non strategic sectors so much talk about the Telecom sector.
Or the big construction companies -- my mining and energy company and talk about the small companies.
And we did we just don't have the infrastructure so you what you're starting to -- -- policy in this is that this is really critical to the to those long term opportunities are we need to can -- continued reforms.
In particular to -- capital market develops so that -- capital can be allocated -- across economy more efficiently so.
We've seen data that suggests that returns on equity for the private sector private sector companies -- -- -- medium sized companies.
Are our orders of magnitude more than two times we -- in the state owned enterprise sets and so is Fred that's the opportunity.
Okay Eric we got to leave it at that but I hope you are right because again if they have that that creation of all -- small middle sized businesses that economy could take off a lot more and it has in the past already -- Brock.
Clough capital partners with an optimistic view of what's happening in China -- thank you very much list -- --
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