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http://www.valuewalk.com/2016/06/chinese-debt-crash/
China’s attempts to keep its economic engine revving at high speed, with the country’s total private and public debt now ballooning to a 249% debt to GDP ratio, could be “fatal,” a Chinese economist told reporters. Not only is debt growing, but the addiction to cheap money is hard to break.
Leading Chinese economist calls debt addiction “fatal”
China’s borrowing to end 2015 touched new highs at 168.48 trillion yuan, or $25.6 trillion, Li Yang, a senior researcher with the leading government think-tank the China Academy of Social Sciences (CASS) was quoted as saying. The exact debt in China has not been universally agreed upon. The total debt – which includes government, corporate and household borrowing – was less than some non-government estimates and underneath the US, which was reported at 331% debt to GDP.
While debt can build growth in the near term, such stimulative measures are not likely to result in sustainable economic growth but more like a sugar high. The problem with sugar highs is the result in crashes.
“The gravity of China’s non-financial corporate debt is that if problems occur with it, China’s financial system will have problems immediately,” Li was quoted as saying in the Guardian.
Local governments have been going on a significant debt spree, and this is creating “systemic risks” to the economy. Chinese banks, closely linked to the government, could lead to a seismic default and require an intervention.
“It’s a fatal issue in China. Because of such a link, it is probably more urgent for China than other countries to resolve the debt problem,” Li said.
IMF expresses concern over China’s debt problem, says they need to act in a “timely fashion” to “avoid dangerous detours”
This isn’t the first time that Chinese debt moving beyond logical levels of sustainability has raised concerns.
More recently, International Monetary Fund Deputy Managing Director David Lipton expressed concerns but also pointed to improvements at a recent conference on debt sustainability: “There is moderate progress reorienting the economy from investment to consumption, with the latter having contributed about two-thirds of growth in 2015,” he said. “Growth is being driven less by heavy industry and exports and more by services and manufacturing for household consumption than in the past. These are important developments.”
But these positive developments could be negated by a compounding debt problem that can grow out of control. If issues are addressed in a “timely fashion” China could “move along a desirable path and avoid dangerous detours,” Lipton said, pointing to the positive outcome. “Whether you look at the history of economic transformations or the aftermath of the Global Financial Crisis, bold and determined action is rewarded—while missteps are penalized.”
Lipton pointed to a problem previously reported on in ValueWalk: State-owned enterprise (SOE) debt, which has spiraled out of control. Such debt, some of which is questionable in nature, makes up nearly 55% of corporate debt. The problem is SOEs only generate a 22% share of economic output, the IMF noted. Furthermore, these state-owned enterprises are “far less profitable than private enterprises.”
China debt issue comes on top of hedge fund and bank analyst scorn
On April 21, Bank of America Merrill Lynch investment strategists David Cul, Tracy Tian and Katherine Tal noted the significant problem state-owned enterprise (SOE) investment bonds could pose to the economy, potentially creating “instability” if the implicit government promise to back the bonds is not kept.
Any major SOE bond default would be difficult for the financial system to handle – as it is unexpected, it could lead to panic selling/a credit crunch,” the research report stated.
The concern for volatility and reckless debt practices has spread to the likes of George Soros and Kyle Bass each initiating rather aggressive investment measures. Bass, for his part, said last February China’s debt experiment is exploding.
“We have been vigorously studying China over the last year, with the view that the rapid credit expansion in the Chinese banking system will result in significant credit losses that will require the recapitalization of Chinese banks and materially pressure the Chinese currency,” the Dallas-based hedge fund manager said in a letter to investors reviewed by ValueWalk. “This outcome will have many near-term and long-term effects on countries and markets around the world. In other words, what happens in China will not stay in China.”
When will the debt filled binge end? Not anytime soon, apparently. On Wednesday, the People’s Bank of China said new loans extended by banks jumped to 985.5 billion yuan last month, up from 555.6 billion yuan in April
China’s attempts to keep its economic engine revving at high speed, with the country’s total private and public debt now ballooning to a 249% debt to GDP ratio, could be “fatal,” a Chinese economist told reporters. Not only is debt growing, but the addiction to cheap money is hard to break.
Leading Chinese economist calls debt addiction “fatal”
China’s borrowing to end 2015 touched new highs at 168.48 trillion yuan, or $25.6 trillion, Li Yang, a senior researcher with the leading government think-tank the China Academy of Social Sciences (CASS) was quoted as saying. The exact debt in China has not been universally agreed upon. The total debt – which includes government, corporate and household borrowing – was less than some non-government estimates and underneath the US, which was reported at 331% debt to GDP.
While debt can build growth in the near term, such stimulative measures are not likely to result in sustainable economic growth but more like a sugar high. The problem with sugar highs is the result in crashes.
“The gravity of China’s non-financial corporate debt is that if problems occur with it, China’s financial system will have problems immediately,” Li was quoted as saying in the Guardian.
Local governments have been going on a significant debt spree, and this is creating “systemic risks” to the economy. Chinese banks, closely linked to the government, could lead to a seismic default and require an intervention.
“It’s a fatal issue in China. Because of such a link, it is probably more urgent for China than other countries to resolve the debt problem,” Li said.
IMF expresses concern over China’s debt problem, says they need to act in a “timely fashion” to “avoid dangerous detours”
This isn’t the first time that Chinese debt moving beyond logical levels of sustainability has raised concerns.
More recently, International Monetary Fund Deputy Managing Director David Lipton expressed concerns but also pointed to improvements at a recent conference on debt sustainability: “There is moderate progress reorienting the economy from investment to consumption, with the latter having contributed about two-thirds of growth in 2015,” he said. “Growth is being driven less by heavy industry and exports and more by services and manufacturing for household consumption than in the past. These are important developments.”
But these positive developments could be negated by a compounding debt problem that can grow out of control. If issues are addressed in a “timely fashion” China could “move along a desirable path and avoid dangerous detours,” Lipton said, pointing to the positive outcome. “Whether you look at the history of economic transformations or the aftermath of the Global Financial Crisis, bold and determined action is rewarded—while missteps are penalized.”
Lipton pointed to a problem previously reported on in ValueWalk: State-owned enterprise (SOE) debt, which has spiraled out of control. Such debt, some of which is questionable in nature, makes up nearly 55% of corporate debt. The problem is SOEs only generate a 22% share of economic output, the IMF noted. Furthermore, these state-owned enterprises are “far less profitable than private enterprises.”
China debt issue comes on top of hedge fund and bank analyst scorn
On April 21, Bank of America Merrill Lynch investment strategists David Cul, Tracy Tian and Katherine Tal noted the significant problem state-owned enterprise (SOE) investment bonds could pose to the economy, potentially creating “instability” if the implicit government promise to back the bonds is not kept.
Any major SOE bond default would be difficult for the financial system to handle – as it is unexpected, it could lead to panic selling/a credit crunch,” the research report stated.
The concern for volatility and reckless debt practices has spread to the likes of George Soros and Kyle Bass each initiating rather aggressive investment measures. Bass, for his part, said last February China’s debt experiment is exploding.
“We have been vigorously studying China over the last year, with the view that the rapid credit expansion in the Chinese banking system will result in significant credit losses that will require the recapitalization of Chinese banks and materially pressure the Chinese currency,” the Dallas-based hedge fund manager said in a letter to investors reviewed by ValueWalk. “This outcome will have many near-term and long-term effects on countries and markets around the world. In other words, what happens in China will not stay in China.”
When will the debt filled binge end? Not anytime soon, apparently. On Wednesday, the People’s Bank of China said new loans extended by banks jumped to 985.5 billion yuan last month, up from 555.6 billion yuan in April
Who is this Li Yang? Just becos he is Chinese? What a joke! China is growing stronger than ever. 
