As China prepares to ring in the year of the Fire Rooster this weekend, its central bank has ordered lenders to strictly control the amount of loans issued in the first quarter of 2017 – an effort to cut the country’s ballooning levels of debt.
China’s debt pile has burgeoned from 150 per cent in 2008 to over 250 per cent last year, but experts disagree on how concerning this really is.
The Middle Kingdom’s credit levels soared after the financial crisis, when a collapse in demand for its exports threatened the stunning rate of growth enjoyed since reforms approving private enterprise were begun in 1979. Last year alone, non-financial sector debt expanded by nearly 75 per cent. Corporate debt currently stands at 169 per cent of China’s GDP.
The binge began in 2009, when the authorities issued a $600bn stimulus package, administered through the state-banking system. Loans were made to provided loans to state-owned enterprises (SOEs) in industries such as oil, coal, steel and construction, with a view to boosting domestic growth through better infrastructure.
But as China makes its transition from an industrial economy to one which is consumer-led, these indebted industries have entered a structural decline from which they are unlikely to emerge. Easy access to credit has allowed companies to limp on, without any serious threat from defaulting on their obligations, and China has met its target growth rate of 6.5 to seven per cent a year (at least if you believe the official statistics).
The more China borrows, the more it will have to spend servicing its debts – and that will weigh on economic growth in future. “A banking crisis is likely to be avoided yet again in 2017, in light of another year of GDP growth exceeding six per cent,” S&P Global Ratings credit analyst Qiang Liao said last week. “However, the current trajectory is not sustainable”. Indeed, real GDP is forecast to slow this year to 6.2 per cent, down from 6.7 per cent last year.
Nonetheless, many refute the claim that China is heading for a crisis. Little of its debt comes from overseas lenders. Also, there is an expectation that lenders will always have their balance sheets replenished by the government.
“Although the rapidity of debt accumulation is alarming, it is concentrated in the state-owned sector and issued by state owned banks,” writes Ed Smith, allocation strategist at Rathbones. “This presents policy-
makers with far more levers to pull in order to avert any dislocating impact on monetary institutions.”
Debt-to-equity swaps are being forced on so-called zombie companies which are overleveraged and are no longer profitable. In December, the first such restructuring deal was reached with Sinosteel Corporation, with half of a 60bn yuan (£6.9bn) package used to pay creditors, and the rest used to issue convertible debt.
Not only does it have the financial levers, the Communist Party will seek to manage the situation in the least disruptive way, lest civil unrest result from large-scale unemployment.
According to a recent outlook by Macquarie, the risk of default is not China’s main problem – but rather that capital is misallocated “as the majority of credit is poured to the less efficient SOEs and local governments rather than the private sector.”
First world problems
The country’s debt requirements may also ease as it transitions to a more consumer-focused economy, thinks Smith. “The reorientation to a consumer-driven economy looks well advanced. The service sectors are booming, and far less debt is required for the expansion of these capital-light industries,” he writes.
Household borrowing may be a more pressing concern. Consumer lending outstripped saving in China last year, according to S&P, and incomes have not been rising at the same rate as debt levels.
As China looks to the New Year, its biggest economic threat may be its ageing population. Yesterday, the State Council’s population development plan forecasts that 25 per cent of people will be 60 or over by 2030, up from an estimate of 13.3 per cent from 2010. More people living longer is a cause for celebration, of course – but also adds to China’s growing list of future economic dilemmas.