China’s Debt Surge Pressures Xi-Li
to Avert Lost Decade
A Chinese lending spree of the magnitude that tipped Asian nations into crisis in the
late 1990s and preceded Japan’s lost decades is putting pressure on top leaders to
map out a strategy to tackle the threat.
Half of the economists in a Bloomberg News survey say non-performing localgovernment and corporate debt will probably have a “significant impact” on China’s
credit and economic growth. The central government will deal with bad loans at local
governments in the next 18 months by expanding the municipal-bond market and
letting localities refinance with direct bond sales, respondents said.
Enlarge image
Visitors to the Bund area look at buildings in the Lujiazui district of Shanghai, on June 30, 2013. Photographer: Tomohiro
Ohsumi/Bloomberg
3:34
Aug. 6 (Bloomberg) -- Donghyun Park, principal economist at the Asian Development Bank, talks about the region's economic
growth prospects. He speaks from Singapore with Rishaad Salamat on Bloomberg Television's "On the Move." (Source:
Bloomberg)
4:38
Aug. 5 (Bloomberg) -- David Gaud, a Hong Kong-based senior portfolio manager at the asset management unit of Edmond de
Rothschild Group, talks about the impact of Federal Reserve and European Central Bank monetary policies on markets, and the
outlook for China stocks. Gaud speaks with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)
Avoiding a fate akin to Japan’s growth collapse of the 1990s hinges on Chinese
officials’ ability to reduce debt and shift policy, JPMorgan Chase & Co. says.
President Xi Jinping and Premier Li Keqiang, developing a reform strategy due at a
Communist Party meeting later this year, may get input from a State Council-ordered
audit of government borrowings and a World Bank-assisted study on urbanization.
“The debt ratio is absolutely dangerous, there is no question,” said Yao Wei, China
economist at Societe Generale SA in Hong Kong, ranked by Bloomberg as the most
accurate forecaster of the nation’s gross domestic product. “There is a high risk that
this debt issue will have significant downside pressure on Chinese growth in the next
few years.”
Local-government debt may have surged by as much as 50 percent since the end of
2010. Borrowings as of June 30 ranged from 15 trillion yuan ($2.4 trillion) to 16
trillion yuan, according to estimates of four analysts.
Audit Estimate
That compares with the National Audit Office’s 10.7 trillion yuan estimate for the end
of 2010. The agency said July 28 that the cabinet ordered a new nationwide review
of government debt.
China today and Japan in the 1980s share a buildup in broad measures of credit to
almost double the economy’s size, JPMorgan analysts said in a July 19 report.
China’s credit-to-GDP ratio rose to 187 percent in 2012 from 105 percent in 2000,
compared with Japan’s increase to 176 percent in 1990 from 127 percent in 1980,
JPMorgan said.
Investor inquiries on the similarities between China now and Japan then prompted
the report, said Grace Ng, a JPMorgan economist in Hong Kong. “Normally and
internationally speaking, if a country’s debt ratio increases so rapidly, its probability
of financial crisis is higher,” Ng said.
Mitigating Forces
While risks may be reduced by forces such as that the increase is in debt held
mainly by domestic investors and the national savings rate is more than 50 percent
of GDP, “these mitigating factors also existed in Japan in the late 1980s,” JPMorgan
said in its report.
Goldman Sachs Group Inc. draws a comparison to the Asian crisis of 1997-98,
saying China’s debt-to-GDP ratio has increased by 56 percentage points in the five
years through 2012.Thailand had an advance of 66 percentage points
and Malaysia’s was 40 percentage points in the five years before Asia’s turmoil,
Goldman Sachs said in a July 26 report.
Nomura Holdings Inc. said earlier this year that the “5-30” rule shows rising risks of a
financial crisis in China. That’s because leverage in Japan, Europe and the U.S.
increased by about 30 percent of GDP in the five years before crises, compared with
Nomura’s estimate of 34 percent in the five years through 2012 for China.
IMF Report
China’s stock of credit is among the highest in the world at its level of per capita
GDP, theInternational Monetary Fund said last month in its annual report on the
nation’s economy.
Yet comparisons with Japan are “misplaced” because Japan also had property and
stock bubbles that burst with “debilitating consequences,” said Murtaza Syed, IMF
deputy resident representative in Beijing.
“China is still at a relatively early stage of its development, and so with the right
policies and reforms it can look forward to many years of still relatively strong
growth,” Syed said.
Investors will see China’s progress in tackling the issue in July credit
and lending data due by Aug. 15, with the median analyst estimate for money-supply
growth of 13.9 percent. That’s down from 14 percent in June, when a governmentengineered cash squeeze helped curb shadow banking.
The Asian Development Bank may lower its 2013 and 2014 growth forecasts for
China in October, Chief Economist Rhee Chang Yong said in an e-mail yesterday.
The bank in a July 16 report gave a 2013 projection for 7.7 percent expansion.
Detroit Filing
Last month’s bankruptcy filing by the U.S. city of Detroit “sounded alarms for many
local Chinese governments,” said Hu Yifan, chief economist at Haitong International
Securities Group in Hong Kong.
The situation is “actually not so scary if you take the size of state-owned assets into
consideration,” Hu said. Yu Yongding, a former central bank adviser, estimated the
assets’ value at 100 trillion yuan, almost double GDP.
Even so, policy makers “better not fall asleep” on crisis risks, Yu said at a July 31
forum in Beijing. “I’m suspicious of local governments’ willingness and abilities to
repay their debts,” Yu said.
The World Bank said in November it’s working with the State Council’s Development
Research Center on an urbanization study, at Premier Li’s request, after copublishing a report last year proposing reforms so China can become a high-income
society by 2030.
Growth Impact
Concern that financial risks will harm growth has weighed on stocks this year, with
the Shanghai Composite Index (SHCOMP) down 15 percent from its 2013 high on
Feb. 6. The gauge rose 0.5 percent today.
The Bloomberg News survey, conducted from July 24 to July 31, found three of 12
respondents expect bad debt to have a “significant impact” on credit and economic
growth, with two seeing a “very significant impact” and one expecting a full-blown
financial crisis. Six analysts saw a small effect on lending and the economy.
While 11 analysts unanimously said China would expand municipal bond sales, five
respondents said China may also sell non-performing loans to bad-debt managers or
create new managers. Three said China would allow some local-government
financing vehicles to default on debt. Respondents could choose more than one
answer.
Ding Shuang, senior economist at Citigroup Inc. in Hong Kong, said China may slow
down debt expansion and then use measures including developing capital markets,
he said.
“I don’t think it’ll be resolved easily,” said Ding, who previously worked at the IMF.
“It’s a venture the Chinese government has never had at this scale and this
sophistication.”
--Shen Hu, Ailing Tan, with assistance from Alan Wong in Hong Kong. Editors: Scott
Lanman, James Mayger