[Gletkin]

China’s debt soars to 250% of GDP
by Katie Holliday
CNBC
Monday, 21 Jul 2014 | 11:42 PM ET

China's debt has soared to two and a half times its economy, Standard Chartered estimates, highlighting the difficulties Beijing faces in balancing growth with the risk of bubbles forming in its economy.

Total financial credit has surged to 251 percent of gross domestic product from 147 percent at the end of 2008, the bank said.

"The economy will continue to leverage up, and the market will remain concerned," said Stephen Green, chief China economist at Standard Chartered.

Since the financial crisis of 2008, China has relied heavily on credit to spur its high growth rates, but the alarming pace of credit growth has triggered worries for investors, especially as rapid build-ups in debt have signaled the onset of financial crises in other economies.
As a result, policy makers in China have faced the difficult task of trying to slow economic growth to more sustainable levels without causing a hard landing scenario – when an economy rapidly shifts from growth to slow growth to no growth.

In recent months the government has implemented a number of easing measures designed to mildly stimulate the economy. Measures included cutting the reserve ratio requirements for banks which provided loans to the agricultural sector, for example.
And their efforts appeared to have worked as second quarter growth for 2014 came in at a 7.5 percent, in line with the government's annual target and up from 7.4 percent in the first quarter.

But many analysts remain concerned about China's growing level of credit and the risks it poses to the country's economic health.

"People have been ignoring a lot of risks out of China; look at the property market, look at how fast bad debts have been showing up in the financial system," said David Cui, head of China equities at Bank of America Merrill Lynch.
"Things have got so bad – it will probably take a financial crisis to cleanse the bad stuff out of the system – for the government to write off debt, to let banks raise more equity... and also severely reduce overcapacity," he added.


Earlier this year China experienced its first corporate credit default in 17 years sparking fears the incident could prompt a domino effect.
"I think there will be an avalanche of defaults coming out of the system. This is only the beginning," said Cui.
"The key issue is excessive capacity and overleverage when you combine these two factors it makes defaults almost inevitable," he added.

China's state auditor said in late December that local governments had outstanding debts of $3 trillion as of the end of June 2013, up 67 percent from the last audit in 2011.
Meanwhile country's corporate debt hit a record $12 trillion at the end of last year, Standard & Poor's estimated, equivalent to 120 percent of GDP.

China's debt to GDP level is still lower than other major world economies, however.

The U.S. had a total debt-to-GDP ratio of about 260 per cent by the end of last year, while the U.K.'s ratio was at 277 per cent. Japan topped the world table at 415 per cent, according to Standard Chartered.

[Lexington]

I read an article on FT on Monday that talked about this and had some (scary) context:

“China’s current level of debt is already very high by emerging markets standards and the few economies with higher debt ratios are all high-income ones,” said Chen Long, China economist at Gavekal Dragonomics, a research advisory. “In other words China has become indebted before it has become rich.”

By comparison, the US had a total debt-to-GDP ratio of about 260 per cent by the end of last year, while the UK’s ratio was at 277 per cent. Japan topped the world table at 415 per cent, according to Standard Chartered calculations.

The Chinese government has officially recognized the problem for a few years now but they've been alarmingly timid at stalling this borrowing because they want growth - even if it's funded by borrowing. So on the one hand, China has improved lending standards in traditional banking but cut the amount of money banks need to make loans. The result? The money flows where those improved standards don't apply - the Chinese shadow banking system. That defeats the purpose entirely (and more) of improving lending standards in the first place if the money just flows into dark places where there those standards don't exist.

I think the only explanation for why the Chinese would need to be borrowing at this rate to sustain GDP growth is that the previous model for growth is no longer working - exports and domestic consumption simply aren't consuming enough of Chinese investment to sustain growth. They've become too rich to compete with poorer countries over what they have done for decades in manufacturing and too big too rely on exports, so the only thing to be done is to borrow to keep these rates of growth, investing in things that won't pay back. But that's obviously unsustainable.

A lot gets made about the fact that China owes this money to itself. It is better to say that "Chinese owe money to other Chinese". But the US demonstrated just a few years ago that you can have a perfectly ruinous financial crisis even if you owe money mostly to yourself.

That is alarming. I would love to see China become wealthy and prosperous but there seems to be political blindness to transitioning into a sustainable path to getting there and a remarkably dangerous situation developing in their finances instead.

[benpenguin]

China is very aware that it needs to completely revamp all its industry and abandon the pure "low cost, mass production" model, but things like that don't happen in a whim.
For example here in Guangdong where most of its wealth wass accumulated by making cheap stuff, the economy has pretty much slowed down. Factories that sprouted like mushrooms a decade ago are dropping like leaves. The survivors though, are making much, much better quality stuff.
China still needs the borrowing to sustain its old model while it struggles to revolutionize to the new one.

[pikachu]

I can understand the desire of the Chinese leadership to transition to slower growth gradually rather than sharply, which appears to be what China is doing. In the meantime they can borrow money from their citizenry and invest them in areas which will hopefully bring more sustainable growth.

[Fasces]

That is alarming. I would love to see China become wealthy and prosperous but there seems to be political blindness to transitioning into a sustainable path to getting there and a remarkably dangerous situation developing in their finances instead.

Not so much a blindness as they've forced themselves into a corner. The Chinese regime has legitimized itself through its economic growth, and the second it slows down is when this newly created middle class on the coast begins itching for political change, as we saw in Tianamen, and more recently, Hong Kong.

Its not a sustainable solution, but the current leaders don't have a choice. They need to buy time to begin reinvigorating their base of support - nationalism/irredentism being the easy way to do it, unfortunately for the rest of East Asia. They're finally moving forward on their ambitions re: first island chain, which shows a political shift.

[Powerup]

The Chinese regime has legitimized itself through its economic growth, and the second it slows down is when this newly created middle class on the coast begins itching for political change, as we saw in Tianamen, and more recently, Hong Kong.

How is either the Tiananmen or Hong Kong related to the mainland middle class? LMAO.

[ThirdTerm]

China's phenomenal economic growth depends on foreign direct investments from economically developed countries such as Japan and the US, which help Chinese manufactures copy more advanced technologies non-existent in China, and the undervalued yuan to keep its economy artificially competitive through currency manipulations. Chinese goods are unbelievably cheap in Western countries because of the exchange rate trick and we know that China is intentionally keeping the yuan below its true market value to give Chinese exporters an edge over Asian competitors in overseas markets, which has been condoned so far by Washington. China's central bank has driven down the value of the yuan against the US dollar by 2.8% in 2014, while the Japanese yen has declined by nearly 48% relative to the US dollar in the past two years. China is waging a currency war or competitive devaluation to prevent Japan's economic recovery but volatile currency markets are detrimental to the overall health of the Chinese economy.

It’s fair to say the markets in China have been a bit erratic lately. In the past week, Chinese equities recorded the biggest one-day loss in five years, before rebounding by 3% the next day; the yuan dropped against the dollar by the most ever over a two-day period; and bond prices tumbled after the government said traders could no longer use some risky bonds as collateral. People began to panic a little. What’s going on in the Chinese economy is that people are getting acquainted to a new story—actually, a “new normal,” as the government frames it. The 25-person Politburo said last week that “new normal” is a focus on quality economic development while incorporating previously outlined reforms, which include lessening state-planning and liberalizing interest rates and the currency.
http://fortune.com/2014/12/11/what-chin ... s-economy/

[Fasces]

How is either the Tiananmen or Hong Kong related to the mainland middle class? LMAO.

... They're the protestors...

[benpenguin]

Not so much a blindness as they've forced themselves into a corner. The Chinese regime has legitimized itself through its economic growth, and the second it slows down is when this newly created middle class on the coast begins itching for political change, as we saw in Tianamen, and more recently, Hong Kong.

Actually Powerup is right, Tianamen is a long time ago, China wasn't opened much back then. As for Hong Kong - speaking as a Hong Konger living in China myself, I can tell you we are a different race...culturally speaking. Thus, the liberal sentiments of Hong Kong is not getting any sympathy inside China - most mainland Chinese are simply annoyed with Hong Kongers, regarding the umbrella protests as a Western ploy to get to China, while Hong Kongers are regarded as useful idiots or traitors.

Its not a sustainable solution, but the current leaders don't have a choice. They need to buy time to begin reinvigorating their base of support.

Actually the current generation of leaders, especially Xi, has very enthusiastic support from the population, particular from his anti-corruption efforts. I feel a change in atmosphere here, compared to a decade ago. I can safely tell you the Chinese government is currently not in any danger of collapsing.

[Fasces]

Both the protestors at Tianamen and Hong Kong were urban bourgeoisie. The entire idea of the Harmonious Society is to placate them. The CCP is torn in two - the interests of the peasants and urban middle class are not aligned, but for now, economic growth keeps the country stable. Without it, China would be In a dangerous place.

The growth of the middle class, in every country, has been linked with an increase in pluralist and liberal attitudes by that class, and China is not exceptional in that regard. We see the same thing we saw in Korea, Taiwan, and Europe.