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Part 1 – How China’s Looming Debt Crisis Will Impact Domains

Part 1 – How China’s Looming Debt Crisis Will Impact Domains

I’ve been concerned about China’s debt levels for quite some time and the impact that a Chinese economic meltdown may have on the domain industry. After returning from a week’s vacation I decided that it was time to start digging into the data and piecing together a number of anecdotal data points.

Escrow.com

It didn’t take long to discover that just about every major investment media source is concerned about China’s debt problems. Back in October 2015, The Economist had a little chart with the title, “Still Bingeing”, that outlined China’s total debt as a % of GDP. The chart can be viewed below

China bingeing on debt

On the 22nd Feb, Bloomberg News had a headline announcing that China’s debt will peak at 283% of GDP in 2019. To put this into perspective, the USA debt to GDP ratio is 104%.

Having a debt ratio of China’s magnitude is scary to say the least and many commentators suggest that this is only sustainable as long as China is able to maintain a GDP growth of greater than 6%. The problem is that the Chinese economy has not been growing as fast as the increase in debt levels.

For example, the country’s banks extended a record $US385 billion of new loans in January. Bloomberg news stated, “The increase in debt could pressure the country’s credit rating, Standard & Poor’s said on Tuesday, less than a week after the cost to insure Chinese bonds against default rose to a four-year high.”

The first problem is the Chinese economy is slowing down and is being propped up by massive injections of capital in the form of debt. So called state-owned “zombie” companies are being constantly bailed out rather than put down. These companies can repay the interest on loans but not the principal which just exacerbates the problems.

The second problem is the Chinese fuelled real-estate bubble collapses. Beijing and Shenzhen are up by more than 700% since 2000 and this has driven Chinese investors to look at high end top coastal cities in English-speaking countries. For example, Sydney, Melbourne, Auckland, Singapore, San Francisco, LA, Vancouver, New York, London….

The Chinese real-estate market has been falling for over a year and investors looked to the stock market, driving it up by over 160% in mid-2015. Dumb money entered the market and within 2.5 months the Shanghai Composite Index fell 42%.

The Shanghai Composite Index

The Chinese government has been trying to prop up the market ever since by buying hundreds of billions of dollars in stocks. This is an artificial way to keep the stock values from collapsing but ultimately the companies will be devalued to their true worth.

Some commentators are suggesting the index should fall by as much as 80% and sit around 1,000. Just watch the fall-out in the international real-estate markets when this happens!

What’s really interesting is the “non-performing loans” have jumped by over 50% between Dec 2014 and Dec 2015. “Non-performing loans” are loans where the borrower is defaulting. It will be interesting to see if the Chinese banking sector is healthy enough to handle waves of defaults. As 2008 proved the USA banks weren’t up to the challenge.

In the next article in this series I will apply this background of information on China to the domain industry.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

Part 2 – How China’s Looming Debt Crisis Will Impa...
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Comments

Guest - Leonard Britt on 12 April 2016
US Debt crisis looming?

The US certainly has its own debt problems as well. How might a US dollar devaluation affect the domain market?

The US certainly has its own debt problems as well. How might a US dollar devaluation affect the domain market?
mgilmour on 16 April 2016
RE:US Debt crisis looming?

A devaluation in the $US won't be a problem for domain owners in the $US as there isn't a currency change. European domainers, who get most of their revenue via $US will love this! Over the last couple of years European domainers have really suffered a depressed Euro. One of the great things about ParkLogic (my own company) is that our clients are largely sheltered from exchange rate changes at the optimisation level as traffic flows automatically through to the highest payer (european or US based).

A devaluation in the $US won't be a problem for domain owners in the $US as there isn't a currency change. European domainers, who get most of their revenue via $US will love this! Over the last couple of years European domainers have really suffered a depressed Euro. One of the great things about ParkLogic (my own company) is that our clients are largely sheltered from exchange rate changes at the optimisation level as traffic flows automatically through to the highest payer (european or US based).
Guest - Joseph Peterson on 16 April 2016

Worrisome, to say the least.

Worrisome, to say the least.
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