Saturday, June 05, 2010

Debt in the West is a problem, not in China - Arthur Kroeber

ark photo apr 08-1_head shotArthur Kroeber by Fantake via Flickr
When China has a huge debts, financial experts in the West move into the crisis mode, while they better look what is happening in their own economies, says Arthur Kroeber in a comment in DNA India.
“I’m mystified as to why people are obsessed with this debt issue,” says Arthur Kroeber, managing director of GaveKal Dragonomics, an independent research firm.
Kroeber recalls that between 2000 and 2005, “every investor I talked to” was worried about the prospect of a financial crisis in China. “They never asked me about the risk of a financial crisis in the West, and the reality is that we had one in the US.” Similarly today, he says, people say the public debt issue in China is “terrible”, whereas in fact, it should be the situation in the West they should be worrying about.
“The purpose of debt,” say Kroeber, “is to finance stuff where there is a high upfront cost and the return comes much later.” In China, which has a structural growth rate of 8%, debt has been used to finance infrastructure — which will generate future cash flows. On the other hand, in the US and other Western countries, which have structural growth rates of 2-3% public debt levels are way higher.
“And that debt is being used mainly to finance social welfare spending, which produces no cash flow whatsoever.”.
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Arthur Kroeber is a speaker at the China Speakers Bureau. When you need him at your conference, do get in touch.
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