China’s debt mountain casts shadow over corporate revenues amid slowdown
After China’s economy recorded its slowest quarterly growth in six years, one question perplexing analysts is how much debt is in circulation and what percentage of it will turn bad.
It’s a major question mark for the world’s second largest economy as any slowdown will hit corporate revenues and margins, leaving less in the kitty to repay creditors. At the same time, falling tax and land sales revenues also dent government coffers just when officials are expected to step up support to an ailing economy.
As Greece has demonstrated, too much debt can overwhelm an economy and the society that supports it. While China is no Greece, excessive bad loans could delay any future recovery and weigh down corporate and household balance sheets.
“China suffers from a serious case of ‘debt disease’, but the treatment and side effects may not be as severe as some expect,” wrote Matthews Asia strategist Andy Rothman in a research note last week.
Some 282 per cent of 2014 gross domestic product is China’s total debt mountain, wrote McKinsey Global Institute in a February paper.
It’s more likely 236 per cent, say many analysts, including AXA Investment Managers Asia economist Aidan Yao.
No, it’s roughly 300 per cent, according to Beijing-based research group J Capital.
Debt is not just high by international standards but has risen at breakneck pace since the financial crisis when Beijing ordered state-run banks to turn on the liquidity spigots.
A March report by the International Monetary Fund found that corporate debt, taken alone, rose the fastest in Asia and was concentrated in select industries, a finding that actually gave report authors some hope.
“While, on average, Chinese private listed firms have scaled back their leverage ratio since the global financial crisis, SOEs’ leverage at the tail end of the distribution has significantly increased,” International Monetary Fund economists wrote.
At-risk industries, including mining, real estate and construction – the latter two where 60 firms account for more than two-thirds of sector liabilities – remain exposed to sudden profit shocks but falling interest rates will help borrowers, the IMF concluded.
Anne Stevensen-Yang, J Capital co-founder, is less sanguine.
China needs to grow 21 per cent in real terms per annum just to service its debt, she wrote in a slide presentation dated January.
“Since this cannot happen, it means that the banks don’t have enough income to keep making loans unless they get injections from the [People’s Bank of China]. Currently, nearly 100 per cent of new credit in the system is going to rollovers,” she wrote.
However, Beijing’s ability to bankroll bad bank debt is a net positive for some observers. Rothman sees China’s real estate market bottoming out, with 2014 sales volumes up at larger listed developers. He believes the government will stand behind problematic local government, SOE and banks debts.
The implication is that the economy will muddle through despite the depressed housing market and industrial overcapacity.
However, the tab for bad debts will have to be picked up by someone. It will likely fall on depositors who ultimately bailed out the banks the last time round by earning derisory interest on their accounts as banks repaired their balance sheets.
