China Crushed By Debt

We can observe decreasing economic growth rate in China for a long time now, which is currently only 6.4% (the same as it was at the bottom of financial crisis 10 years ago). It should be emphasized that all data releases in China are only for a point of reference (even Chinese officials admit it), and in reality, economic growth is much lower.

Nevertheless, as a result of the policy applied by the Communist Party after crisis, China has experienced several years of economic recovery, which resulted in a gigantic increase in debt. Total debt to GDP is currently around 270%. This means that debt since the crisis has almost doubled!

The chart shows that the largest share in debt is held by state-owned enterprises (dark blue) and local governments units (light blue). Over the last 20 years, a huge increase in household debt (red) have been also observed. In addition, Chinese companies have a significant problem. According to Bloomberg, companies in China and Hong Kong (excluding banks) would need 74 years to pay off all their liabilities using free funds. For comparison, in Argentina (country which regularly announces bankruptcy) 57 years are needed, In Greece (so-called euro - bankrupt) 28 years.

Corporate debt - problem of insolvency

As we mentioned, the situation of many companies in the Middle Kingdom is dramatic, which negatively translates into their bond market. It is worth mentioning that it is the 3rd largest market in the world, after Japan and the U.S., and its capitalization is worth about 13 trillion dollars. This is an equivalent of China's annual GDP.

Along with the growing bond market, companies' insolvency is significantly increasing. Only in the first four months of 2019, enterprises in China did not meet their obligations to bondholders for 5.6 billion dollars. It is 3 times more than in the same period of 2018. If this pace continues, in 2019 we will see new insolvency record. In relation to the overall market value, it is still a small percentage, but in our opinion also these figures look worse in reality.

Despite the growing debt problem, China is trying to further stimulate lending of the corporate sector, especially small and medium-sized companies. On Monday, May 9, Bank of China announced another cut in reserve requirement ratio to 13,5%. As a result, banks will have an additional 280 billion yuan (41 billion dollars) to be used as loans to companies with financial problems. It is worth noting that this is a tenth cut of the ratio since 2014 when it was 20%.

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Gary Anderson 10 months ago Contributor's comment

Debt to purchasing power parity GDP is far lower. This analysis may prove to be flawed, just like Trump thinking he can win a tariff war is flawed.