Advertisement
Advertisement
Stacks of China yuan bank notes are tallied in a bank as lender BNP Paribas calculated the chance of China collapsing under its debts at 15 per cent. Photo: AFP
Opinion
Portfolio
by Benjamin Robertson
Portfolio
by Benjamin Robertson

What’s the chance China will collapse under its debts? About 15 per cent.

The chance that China will have a systemic debt crisis - it’s around 15 per cent, give or take.

That’s the outcome economists at French bank BNP Paribas expect if the world’s second largest economy does not address its fast growing debt pile.

Or to be more specific, the country’s fast growing non-financial corporate debt pile. Debt at household, as well as national and local government level is, for the most part, manageable, writes the bank’s chief China economist Chen Xingdong and his colleagues.

In a report examining whether debt levels will overwhelm the country they write: “Aggregate debts have grown too fast since 2008 to be sustainable…The debt interest costs are too high, at about 15 per cent of GDP per annum.”

The run up started when Beijing pumped trillions of yuan through the nation’s banks in a massive stimulus effort after the financial crisis upended the global economy in 2008. Chinese GDP initially stabilised but concerns lingered that money was poorly allocated.

Those fears were compounded by the nature of the debt; short dated loans often invested into medium and long term projects in sectors already bursting from overcapacity.

Estimated at 77.9 trillion yuan, non-financial corporate debt grew an annualised 24 per cent between 2008 and 2014, equal to more than half of all outstanding debt in China, which as of late 2014 was around 220 per cent of GDP, BNP Paribas economists calculated. Some 66.6 trillion yuan of this debt was issued to state owned enterprises.

Those numbers need to come down.

To be sure, Chen and his team do not expect a crisis anytime soon. The government still has enough tools to manage a sudden slowdown they write.

For now, a debt for bond swap at a government level and debt for equity swap at a corporate level would be one way reduce the burden, suggests the report.

Work has already begun on turning local government debt into longer dated and lower yielding bonds, though recent efforts in Jiangsu and Anhui provinces to sell the end product on the open market initially floundered, forcing Beijing to offer sweeteners.

Securitisation of debt off bank balance sheets, as well as new capital raising and equity swap exercises, were also mooted as potential panaceas.

Ultimately this needs to happen, suggests the report, though Chen and his team only gives this scenario of “moderate deleveraging” a 25 per cent chance.

“The real problem is ambiguity. If the Chinese government is able to provide a detailed picture of the debt problems, we believe the worries could be largely mitigated,” Chen writes.

McKinsey’s China, for example, says outstanding debt totalled 282 per cent of 2014 GDP.

Even using the lower BNP Paribas estimate, the debt growth rate far outstrips any equivalent increase in national GDP and corporate profitability, even as profit margins in sectors including property and utilities have stagnated or fallen since 2008.

China’s most likely scenario at 45 per cent probability; a muddle-through as Beijing props up the economy and struggling corporates while executing wider economic reforms. This option will eventually result in a “prolonged deleveraging” that “will delay growth bottoming out and recovery” that Chen and his team says need to happen.

Post