Had lunch yesterday with Benjamin Shobert. Benjamin is very intellectual and very knowledgeable about China. At some point during our lunch, he talked of recently having attended a China cleantech conference at which the participants talked of how China is THE place for developing cleantech because, among other reasons, it is so heavily supported by the government.
Benjamin told me he then asked about the risk to cleantech investments were China to pull its massive government subsidies and a private equity person responded by saying that he cannot even consider that risk in his investments. Benjamin and I then talked of how that probably makes sense, and not only because this person is investing other people’s money, but because their is no good way to quantify it and his job is to try to make money now while the making is good.
Benjamin then said that a lawyer at the conference mentioned that there is always the risk of some crisis arising that forces the Chinese government to divert its cleantech funds for something else. Benjamin and I then talked of what such a crisis might look like and we thought it might involve the government needing to pay off on bad bank loans or having to prime another pump or two.
Benjamin then posed the following three part question: How we will know when China has reached the point where its bad debt load has gotten too high? Will investors in things like cleantech know in sufficient time to get out? How do we know it has not already started?
I answered as follows:
- I don’t know.
- Almost certainly not.
- We don’t know.
How do you answer?
UPDATE: Countless readers (by emai and by comments) have pointed out that Michael Pettis just recently wrote a post entitled, “Looking for debt” in which he does a seriously (he’s a real economist) analyzes information in an effort to determine China’s debt load. Whether you agree with Pettis or not (and I tend to), he is one of the very few real economists who closely studies China and for that alone, his blog is always worth a read.