Any analyst or market commentator who warns about the debt bubble or "shadow banking" in China is bound to be right... eventually.
My goal is not to be right, but to take another look at some of the signs as they might affect my investments. And I was prompted to do this as Chinese stocks struggle this year worse than the US.
Here are the YTD performances (as of 4/10/18) of some Chinese consumer/tech stocks that are popular among investors in the US...
Tencent (TCEHY - Free Report) : +3.14%
Alibaba (BABA - Free Report) : +2.71%
Baidu (BIDU - Free Report) : -1.16%
JD.com (JD - Free Report) : -1.74%
YY Inc. (YY - Free Report) : -13.06%
These showings don't look too bad. But among broad Chinese stocks indexes, here's the worst view in this 1-year chart of the Shanghai Composite...
Is It "Slowing Global Growth" or Just Debt?
Since I own shares of Alibaba (BABA - Free Report) for the Zacks TAZR Trader portfolio, I was looking for clues to its weakness when I had assumed it was immune from US market troubles. My investing thesis since we first bought shares near $100 in early 2017 was that the "Amazon of China" would continue to build a consumer and technology platform that rivaled what Amazon (AMZN) had achieved, but with a bigger middle-class consumer base.
I found three data points about credit/debt conditions in China that gave me pause.
First, this note from research firm Hedgeye...
The instability of China's credit-fueled, investment-focused growth strategy is, without doubt, one of the greatest systemic risks facing the global economy. Chinese credit outstanding amounts to CNY 181.2 trillion (or $28.7 trillion) as of February 28, 2018 (data released 3/8/2018), which is up CNY +18.1 trillion or +11.1% year over year. Month-over-month, credit is up CNY +1,135 billion or +0.6%. Note: this data is only updated monthly.
Second, this look at the financial subsidiary of Alibaba from Bloomberg...
China Consumer Loan King Ant Financial Hit by Debt Sale Drop
Financing from an obscure part of the debt market that the company has relied heavily on for its key consumer lending business is drying up. It’s sold only 22.8 billion yuan ($3.6 billion) of asset-backed securities tied to consumer lending in the first quarter, down 74 percent from the previous three months, according to data compiled by Bloomberg and China Securitization Analytics.
China’s tech giants led by Ant Financial have been ramping up consumer lending to meet surging demand from cash-strapped millennials buying everything from iPhones to hairdryers on online shopping platforms. The firms then package the lending into ABS, complex financial products that they sell on to investors. The micro-lending driving such debt sales, though, has increasingly been in the crosshairs of regulators as the industry is criticized for sometimes high interest rates and underhanded lending practices.
Third, this article today from Bloomberg...
Flood of Junk Issuance Raises Risks in China's Bond Market
A challenge for investors all over the world, corporate governance is becoming a particularly thorny hurdle for investors in China’s bond market as the amount of low or unrated borrowers swells.
I will remain an investor in Alibaba, but it's always good to check in on the credit/debt cycle in the land of never-ending growth.
Disclosure: I own shares of BABA for the Zacks TAZR Trader.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click Follow Author above to receive his latest stock research and macro analysis.