China credit risks grow as debt produces less GDP, loans rolled over
Increase in borrowings and low level of bad loans are signals that debt is not being repaid
The mainland is requiring more and more debt to produce less and less growth. This raises the issue not just of where exactly all the money is going, but what happens once we all find out.
It is also causing concern that China might suffer a "Minsky moment", a classic debt bust when investors liquidate positions to satisfy debts taken out for speculation.
Even if we discount the possibility of a sudden bust, the low quality of investment in China implies substantial medium-term risks for its growth and for the growth and well-being of pretty much everyone else.
First the facts - while growth in the first quarter cooled to 7.7 per cent from 8.1 per cent a year ago, this was achieved in part courtesy of a 58 per cent bump in aggregate credit. On that basis, every dollar borrowed in China is now producing only 60 per cent of the growth it would have generated a year ago.
Since 2009, when China's leadership flooded the market with credit to counteract the slump, credit growth has exceeded nominal growth in gross domestic product in every quarter save one, a huge reversal from the earlier pattern. While aggregate credit created in April fell month on month, it was still up more than 70 per cent from the previous year.
"At the micro level, we notice that a non-negligible share of the corporate sector and local government financing vehicles are struggling to cover their financial expense. At the macro level, we estimate that China's debt servicing costs have significantly exceeded underlying economic growth," Societe Generale economist Wei Yao wrote in a note to clients. "As a result, the debt snowball is getting bigger and bigger, without contributing to real activity."