China’s debt is growing faster than its economy and analysts said there’s no quick fix

Chinese levels of borrowing may be Asia’s greatest economic risk, they said

PUBLISHED : Thursday, 07 April, 2016, 4:14pm
UPDATED : Monday, 30 May, 2016, 5:11pm

China’s growing debt is the biggest risk to the Asian economy and there is no quick fix in sight, analysts said.

That’s despite slowing credit growth in the world’s most-populous country and second-largest economy.

China ranks third globally when the size of the economy is weighed against debt. Hong Kong and Russia lead the rankings, according to data from analysts at Standard Chartered Bank.

The wider the credit-to-economic-growth gap, the higher the debt risk.

China’s public and private debt compared with economic growth was 5.4 percentage points in December, the bank’s report said. That compares with a peak of 8.8 percentage points in 2013.

Debt increases of more than five percentage points in excess of gross domestic product (GDP) growth — a key measure of an en economy’s size — is categorised as highly risky and a ‘red flag’ that signals problems to come, according to a Standard Chartered report, citing a study by the World Economic Forum from 2011.

The Forum was established in 1971 as a not-for-profit foundation and is headquartered in Geneva. Its annual meeting in Davos-Klosters draws leaders from government and industry.

Asia’s credit boom was spurred by a global financial crisis in 2008 that was sparked by the collapse of US investment bank Lehman Brothers. That is over, analysts said. Now policy makers are struggling to deal with the consequences of excessive Asian credit growth.

Two international ratings agencies, Moody’s and Standard & Poor, adjusted China’s credit outlook to negative from stable. They cited the country’s burgeoning debt burden, falling foreign exchange reserves and uncertainties over its economic reforms.

Analysts said there is “no quick fix in sight” for China’s total debt which is estimated to be US$25 trillion (HK$194 trillion) and that slower economic growth means that growing debt will continue to exceed economic expansion.

That’s despite having measures having been introduced to curb the problem.

The National People’s Congress, China’s top legislative body, imposed a local government debt ceiling of 16 trillion yuan in August to rein in borrowing . It was the first move of its kind.

Analysts said there is “no quick fix in sight” for China’s total debt which is estimated to be US$25 trillion and that slower economic growth means that growing debt will continue to exceed economic expansion

China is also reportedly drafting regulations for a debt-for-equity swaps, which would allow commercial lenders to exchange companies’ non-performing loans for stakes in those same firms.

Still, one of the biggest challenges is corporate-sector debt. It accounts for more than half of China’s debt-to-economy ratio of 254 per cent.

China’s corporate debt is largely fuelled by state-owned-enterprises (SOEs). Their money-owed has jumped to 126 per cent of GDP in 2015 from 92 per cent in 2008 after the government loosened monetary policy via at least six interest rate cuts over the past year to encourage borrowing.

“While SOEs have the advantage of easier access to financing, most suffer from low efficiency,” Standard Chartered analysts Betty Wang Rui, Ding Shuang, and Shen Lan said.

The surge in leverage was driven by companies in real estate, construction and by local SOEs in mining and utilities, according to a working paper from the International Monetary Fund in March.

China’s central government has highlighted the need to improve SOEs’ efficiency. It issued a reform blueprint last year. Analysts said that the process of unloading the firms’ debt will take years.

“With China currently facing both external and domestic headwinds, striking a balance between deleveraging and maintaining the required level of economic growth is a challenging trade-off,” said analysts Betty Wang Rui, Ding Shuang, and Shen Lan.

Overcapacity in the manufacturing sector has dragged on economic growth and will make the process of shedding debt harder, analysts added.

The report also likened China’s current economic and debt situation to levels seen during Japan’s financial crisis of the early 1990s that snowballed into decades of stagnant growth.

Japan’s debt-to-GDP ratio as of June 2015 is the highest in the world at 409 per cent, compared with China’s 254 per cent and the United States’ 251 per cent of GDP.

Analysts said vulnerability in China’s economy could lead to a similar crisis. They cited industry overcapacity, slow reform progress and a shrinking working-age population.

Even so, analysts said China should be able to avoid a repeat of Japan’s experience — so long as economic growth remains above 6 per cent and the country maintains its stable current account surplus.

That should be accompanied by accommodative monetary and fiscal policies, they said.