Strategy China – Framework for anticipating the next downturn
Unlike Japan in the 90’s, the US in 2008 and arguably Eurozone in 2011, China has not reached the peak of its long-term debt cycle as of yet. Following a plethora of policy stimulus and rebounding house prices, China has experienced a cyclical recovery in previously depressed sectors like housing, manufacturing and trade during 2016. The price of this recovery comes in form of elevated structural risk due to unsustainably fast growth of house prices and credit, as well as a relatively high debt level and cost of credit for the private sector.
​This analysis shows three key indicators on both real-time and leading basis, for correctly anticipating a potential downturn in China’s credit cycle: (1) Liquidity, (2) Housing, (3) Credit.The indicators point currently to close-to-neutral risk, suggesting no imminent downturn. As a result, the strategy pursues an asset allocation with a slightly defensive tilt in China.
ThirdYear Capital is a provider of global macro strategy and portfolios, focusing on systematic countercyclical investing.
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