Public Finances

Government Investment and Debt in china according to Prof Geraci

After months of saga on the ESM, not all of Italian Government representatives and political parties who deal with the topic seem to understand well how bonds are valued
di Michele Geraci * (Il Sole 24 Ore Radiocor Plus) - Milano, 28 mag - Il Recovery Fund proposto dalla Commissione Europea potrebbe essere un passo avanti verso una maggiore integrazione tra i Paesi dell'Unione e per i sostenitori...
 (Il Sole 24 Ore Radiocor Plus) - Milan, 17 April - Prime Minister Giuseppe Conte says not to worry too much now about what the new ESM proposal contains: we approve the reform and, anyway, we will always have...
The Financial Times reports that the European Commission intends to launch a new type of Government bond, packaging the bonds of various countries into a single security. I think this is an extremely bad and dangerous idea. First, it is a distortion of the market that would cause large amounts of capital to flow into the bonds of the weaker economies, just as it happened when the Euro was created and interest rates started to converge. Second, The pooling of bonds carrying various risks into a single security, was at the core of the global financial crisis.
In one of my Op-Eds written for Radiocor- IlSole24Ore, Moody’s fa i conti e si allinea alla realtà dei fatti, I talked about Moody's choice to align itself with the reality when China's sovereign debt was downgraded from A1 to Aa3. China's state bonds market is, currently, a non-market: the trading volume is low and the main players are state banks that buy bonds issued by the government and, almost always, they keep them in the portfolio until they expire.
Insiders said that private funds like PAG and Long Star are starting to be interested again in returning to Chinese non-performing loan (NPL) portfolios in recent months. Government loose credit policy in the last three years has boomed the NPL market, which has reached over 3 trillion US dollars at the end of last year. I think the true size of NPL in China (like in any other country) has always been unclear.
In an op-ed written by Morgan Stanley, Global Researcher Chen Aiya, re-affirms his confidence in China’s ability to deal with its increasing debt. I often encourage analysts to look at China as if it was a firm and estimate the usual profitability ratios used in Corporate Finance. In the case of China’s debt and GDP growth path, one could say that its ROC is declining, but still respectable. This decline occurs because current Chinese growth model is based on investment to drive GDP.
The president of Italy is currently in china for an official state visit. This state visit comes at an interesting time for both China and Italy: the two countries are engaging more than before into a commercial dialogue of mutual respect and common interests, trade between the two counties shows good sign of improvement and Italian trade deficit appears to narrow slightly and capital investments made in the past couple of years have all helped improve the image that the Italian Business community has of China.

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