How To Play China's 'Triple Bubble'

A recent report by Andrew Garthwaite shed some light on the “triple bubble” that Credit Suisse sees happening in China. Garthwaite also includes a better Asian alternative for investors than Chinese equities.

Bubble 1: Credit

In the past five years, China has developed the third-largest credit bubble of any country in Credit Suisse’s database.

Historically, private sector debt reaching 10 percent higher than its long-term trend line has been predictive of a financial crisis. China’s private sector debt level is now about 40 percent above its 25-year trend line.

Bubble 2: Investment

Stunningly, the investment share of China’s GDP is currently at levels much higher than any country in modern history has ever witnessed. According to data from the U.S. Geological Survey, China has used more cement in the past three years than the U.S. used in the entire 20th century.

Garthwaite notes that the growth rate of an economy is typically cut in half when it transitions from investment to consumption-led growth.

Bubble 3: Housing

U.S. investors are all too familiar with the type of devastation that a housing bubble can cause, and Credit Suisse notes China’s size of real estate investments as a percentage of GDP is currently three times that of the U.S. at its housing bubble’s peak. In addition, housing starts are currently 12 percent higher than demand in China, and vacancy rates are as high as 23 percent.

A Better Alternative

Rather than fool with Chinese equities, Credit Suisse sees Hong Kong equities as much more attractive. “Hong Kong listed equities are trading in line with their average on a 12m forward P/E multiple and trading on a small discount to the [global] market on P/B,” Garthwaite wrote.

In addition, while Hong Kong equities tend to rise during periods of rising U.S. dollar strength and bond yields, the market already appears to be pricing in a 4.0 percent 10-year U.S. bond yield.

One way for investors to play Hong Kong is via ETFs such as the iShares MSCI Hong Kong ETF EWH.