Will China Debt Balloon Crash Its Economy?

by Umar Farooq
China’s debt has risen dramatically in the past decade, largely the result of credit fed to state-owned enterprises in the wake of the global financial crisis. China debt situation is not only growing in size but also at the rate that economists and policy analysts feel is difficult to sustain. To some, the debt mountain represents a threat to China’s stability and even the world’s economic health, while others argue such fears are overdone as most of the country’s debt is state owned and therefore, they say, manageable.
“The International Monetary Fund (IMF) has urged China to tackle its skyrocketing debt, describing it as unusually high for a developing economy. Analysts are concerned that any turbulence in China would impact the global economy. Beijing has begun to take action but it needs to move faster, said David Lipton, the IMF’s chief deputy managing director. He has met with Chinese finance, economic planning and central bank officials in Beijing. Reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to sharp adjustment, Lipton told a news conference. Estimates of China’s total nongovernment debt have grown from 170 percent of gross domestic product in 2007 to 260 percent of GDP last year, unusually high for a developing country. China turned to fast lending to counter the 2008 financial crisis. At the same time, China’s external debt is low by international standards, at around 12 percent of GDP, according to the IMF. The organization expects China’s economy to grow by 6.7 percent this year and slow down to an average of 6.4 percent in 2018-2020, Lipton said. At the end of May, Moody’s ratings agency cut China’s credit rating, citing the risks from rising debt loads. This was the first downgrade since 1989.”  RT
 

Source: edelsoninstitute
China has gone on a spending spree, borrowing money to build cities, create manufacturing giants and nurture financial markets — money that has helped drives the economic powerhouse in recent years. But the debt-fueled binge now threatens to sap the energy of the world’s second-largest economy.
“China’s debt can be divided into private or business borrowing and public or government obligations. To expand their operations and be competitive, businesses borrow through bank loans and issuing bonds. This expansive lending has occurred for over a decade resulting in $21,600 in bank loans, bonds, and other debt obligations for each person in China. The problem is that businesses in China are state-owned enterprises (SOEs) run and owned by the government in order to keep people working. Loans come mainly from state-owned banks resulting in money being shifted from one pocket to another in the Chinese government accounting methodology. Compounding matters is that Chinese businesses often guarantee each other’s loans and debt obligations. This way of doing business makes it easier for a company to obtain a loan that would otherwise be very difficult. The state-owned banks complicate this situation by lending primarily to SOEs since they have implied governmental guarantees. There is also the role of shadow banking. Shadow banking is bank-mediated business-to-business loans, allowing lending to occur when a potential borrower has been refused by a Chinese bank or not able to float a bond offering. Shadow banking has grown by more than 2 trillion yuan in the first quarter of 2017, approximately two times the amount in the last quarter of 2016. While shadow banking may offer financing possibilities and alternatives a Chinese business may not normally have, there is little to no regulation of these financial relationships that many analysts regard as opaque and susceptible to numerous problems. Currently, shadow banks fund approximately 20 percent of Chinese debt.”  seekingalpha
Borrowing has helped fuel growth in China, but it’s starting to lose its effectiveness. The real risk for this huge debt burden now lies in the unproductive use of debt which will affect China’s productivity.