Quantifying The Top 10 China Risks

Tyler Durden's picture

Morgan Stanley's Qing Wang has created a new tracking concept, the China Macro Risk Radar (CMRR), whose sole goal is to provide a framework to asses and monitor risk events of low to moderate probability (high probability events already have their own standing at the firm and are singled out in client calls) and high impact. As part of its inaugural edition, MS has assigned 10 risk events to four different categories on the CMRR - each risk event is assessed according to six aspects, including its description, content, potential impact, likelihood, timeframe, and evolving direction. We present the top 10 items that are of concern to investors in China, and are likely to provide even more ammunition to the ever increasing roster of China bears.

The events can be summarized along the following four verticals:

Risk Category A: Macroeconomic

  • Risk Event 1: Massive NPLs
  • Risk Event 2: Local Governments Default
  • Risk Event 3: Economic Hard Landing

Risk Category B: Policy and Regulatory Changes

  • Risk Event 4: Rapid Wage Increase
  • Risk Event 5: Introduction of Property Tax
  • Risk Event 6: Resource Tax Reform

Risk Category C: Financial Market Shocks

  • Risk Event 7: Property Bubble Burst
  • Risk Event 8: Commodity Prices Spike

Risk Category D: External Shocks

  • Risk Event 9: European Sovereign Debt Crisis Redux
  • Risk Event 10: Trade Protectionism

Visually, this is summarized as follows:

Here is the drill down by specific category, starting with what what arguably has the most impact on the future of China: the possibility of the complete blow up of China's banking system via a surge in NPLs.

Next in terms of impact - the rolling defaults of local governments:

Last, and probably least impactful in the macro economic category, is the possibility of a macroeconomic hard landing:

In the "policy and regulatory change" category, the biggest risk is the already visible in various region development of a a rapid wage increase.

Next up, the topic that makes daily headlines in the news, and has a both upward and downward impact on the CSI (depending on how some butterfly flaps its wings any given morning), is the Introduction of a property tax

Resource tax reform, while more likely, will probably have less of an impact.

And now for the one all have been waiting for -the property price bubble bursting. While Morgan Stanley assigns only a 20% probability to this event, we believe it is much higher. We also disagree that its impact on the financial markets would be merely moderate: one can argue that the depression currently ravaging the US is predicated by the US property bubble burst. One can see why the property bubble popping halfway around the world in an economy which is basically a mirror image of the US monetary policy would have just as dire an impact (and would perpetually destroy the concept of decoupling, this putting Jim O'Neill out of a job forever).

The possibility of a commodity price spike, while less remote, will also probably have a smaller impact on financial markets, although hardly as little as MS makes it seem.

As for the two key external shocks that are facing China, the main one, and which we believe has by far the highest likelihood, far higher than the traditionally optimistic Morgan Stanley dares to assign, is the reflaring of the European Sovereign debt crisis, which is only a matter of time.

And last is the one thing that can easily end Chuck Schumer's career, whose push to have China revalue the CNY has led to nothing but disappointment, as the US imports in the last month surged to a multi year high. So much for the whole export-led recovery. What happens next is only up to the idiots in D.C., and the probability of an all out trade war is getting ever bigger.

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UncleFurker's picture


Quantification, bitchez!



Hard1's picture

And risk no. 1 is........(drum roll)



bugs_'s picture

There is only one China risk.  When will America slam the door shut?  End of list.

merehuman's picture

America slammed the door shut ..on its own people, on the law and on common sense.

Common sense says cheating , stealing and lying comes to a bad end. To brag that one is "doing Gods work" reminds me of the old adage that "pride comes before a fall".

Inevitably the system, the government and the currency will fall because of thet simple thing, honesty and the present lack of it.

Got trust? 


Modern Money Mechanics's picture

Whoa, where is the oil price shock at +36 months? China now consumes more oil than the USA. The demand for oil China places on world-wide consumption will be a true turning point for peak oil which has not been able to rise above 86 million barrels per day.

JW n FL's picture

The mid-east is hooked on thier own product... $0.25 a gallon gas for the Kingdom. Power Production, Electric... Pump Fuel, 93 octane... that is a snap shot of one Country. Sweet Ligth Crude is / has peaked...


Don't get me wrong, there is lots of oil... just not lots of $70 bbl... more like $200+ bbl... $300 bbl... thusly trade is a joke... thusly protectionism will shine thru, war.. trade or other.

ChopChop's picture

Here in Canada eh we have shitload of polluting oil that is worth extracting at ~80$/bbl. After the BP accident, the Alberta government did some lobbying saying our shit is less polluting that your shit. We however have a extracting cap at ~2millions bbl/day. 

Conclusion #1: Yes we do live in this world

Conclusion #2: Don't worry, the US will be just fine but don't attack us for our oil or we'll kick your ass *cough* Ann Coulter being first *cough*

hugolp's picture

China consumes way less oil per capita than the USA. Yes, they are a lot of people and therefore the toal has gone up, but per capita the USA still beats China big time.

JW n FL's picture

very nice Tyler... Thank You!

GlassHammer's picture

Lo Pan didn't make the top 10 list?


tmosley's picture

A property tax is a great way to immediately burst that bubble, and make the people of China even less free.

bankonzhongguo's picture

Just another silly G-ddamned China metric.  For anyone that cares this barbarian used to work for BOC before anyone was IN China.  Even the biggest PLA SOE and State banks can't even use a database consistantly to provide straight data, let alone navigate it through the bureaucracies in a timely manner - and thats only for the 20% of the developed country.  They are getting better and should be feared, but the fact that someone has to provide a facade of this kind of analysis says how open the economy is.  If it was the 1870's in the American Old West, would believe a stack of papers or the gun fights in the streets to get a lay of the land?  Just as an aside, considering all those metrics are diverging simultaneously - the net sum of all those numbers nears ZERO.  Now THAT'S a trend!  If you are going to hand your money to Morgan Stanley for China, you might as well just go to Vegas and bet on Black or Red (thats a CR joke).  You want to make some China money.  Start 10 years of junkets, get some wonk laid by a toothless blond, learn the language and watch some Chinese grad student trained in America get $1MM to take your technology and business model out of your hands overnight  All those armchair quants in Greenwhich will never penetrate the culture.  I swear to G-d, I'll reach through the Internets and choke the bitchez that use the term "middle kingdom."  Read a treatise about feudal Europe, get a couple new style Chinese girlfriends and pretend that Israel has a population of 1.3 billion.  Then you will understand the work cut out for you.

Mark Noonan's picture


I suspect its even murkier than that - but, no worries:  a large number of big, western banks are convinced that China is the wave of the future...heck, even some American punditryis wondering why we don't set up a Politburo and start getting some of that swell Chinese management here in the US of A.

A giant on pencil thin legs - that is what China is.  Pray for eastern Asia when the crash comes.

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  • Sudden Debt's picture

    Can't wait to see risk 4 to happen! :)


    saulysw's picture

    Well, I feel better. Looking at this, none of the threats are within 3 months. Nothing is red. I can relax, China is all good. Right?

    Sudden Debt's picture

    the party had decided to confirm your assumption. All is good.

    Hard1's picture

    They missed the US debt crisis next to the European

    Grand Supercycle's picture

    DOW/S&P500/FTSE/EURO short signal continues: