【Daily chart】China’s debt binge: putting off the inevitable

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DEBT in China is piling up fast. Private debt, at 200% of GDP, is only slightly lower than it was in Japan at the onset of its lost decades, in 1991, and well above the level in America on the eve of the financial crisis of 2007-08. China’s binging borrowers seem to have run out of good investments. The value of non-performing loans in China rose from 1.2% of GDP in December 2014 to 1.9% a year later. Some big firms are earning too little to service their debts; instead, they are making up the difference by borrowing yet more.

The IMF reckons that surging credit is “the single best predictor of financial instability”, but China might be able to avoid a crisis. Very little of its debt is owed to foreigners, and the government has room to borrow to cushion the economy against loan defaults and failing banks. Yet when Chinese firms eventually flip from borrowing to repaying their loans, growth will probably slow sharply. That could make for difficult times for people in China, and in the rest of the world as well.

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Japan’s debt to GDP ratio is 230%. America’s debt to GDP ratio is 103%. These are large numbers. But they are known. So credit agencies and financial markets have already discounted their effect on the prices of financial assets of these countries.

What about China’s debt to GDP ratio?

Officially, it is a small number: 41%. Unofficially, nobody knows.  Yes, nobody knows. For a good reason: piles of loans from government-owned banks to government owned enterprises.

This unknown is what is most scary about China’s debt, as credit agencies and financial markets have yet to factor its effect into the price of Chinese financial assets.

Compounding the problem, the simultaneous government ownership of both the creditors and the borrowers concentrates rather than disperses credit risks, creating the potential of a systemic collapse — as the Greek crisis so colorfully confirmed.

Worse, government ownership complicates creditor bailouts. The reason why the “haircut” of Greek debt had such a pervasive impact on the Greek economy is that government-controlled banks and pension funds were the creditors of the general government and government-owned enterprises.

And the haircut shifted losses from one government branch to another.

The situation is even more dire in China, where the outright simultaneous government ownership of banks, pension funds, and common corporations has yielded an odd state in which both the creditor and the borrower are government branches.

Government-owned banks lend money directly to government owned corporations, which usually function as welfare agencies; and to land developers, who are behind the country’s “investment” bubble, one of the engines of the Chinese economy.

源济