The Chinese economy has been growing rapidly for years, but that was largely driven by China’s banks and the state extending credit to companies. The lending exploded in the wake of the financial crisis as China sought to negate the impact of falling exports by stimulating infrastructure spending. More recently, the government has been trying to rebalance the economy so that it’s less reliant on manufacturing , while consumer spending is a more important factor. But that has led to a boom in consumer debt as banks have lent money to fuel the spending.
China’s debt pile is growing very rapidly
China’s debt mountain currently stands at about 256% of GDP. That’s actually much less than Japan, where the debt-to-GDP ratio stands at 373%, and about level with the US. However, it’s the rapid growth of the debt that is worrying experts – the sort of pace which can rapidly turn boom to bust. According to the IMF, China’s non-financial sector debt could reach nearly 300% of GDP by 2022. And when government debt is excluded, the rate of growth in corporate and household debt has been even more rapid.
In fact, every facet of China’s economy is affected. The state, commercial banks, state and private companies, and now consumers, have high, and growing, debt levels. Analysts at Deutsche Bank recently warned that China’s banks have never really experienced a consumer credit cycle, and so it remains to be seen how they handle a rise in bad loans – borrowing what consumers can’t repay.
Does this mean a debt crisis is just around the corner? Possibly not. Why? Because China’s government is determined it won’t happen, maintaining a policy of growth at all costs. The government and the People’s Bank of China orders the state-owned banks to lend to state-owned companies, many of them so-called zombie companies that don’t actually do anything, so those companies can refinance debts they are struggling with. That means the smaller banks who own the loans can keep on lending, and so the money flow continues.
Experts have been warning for years that China’s growing debt pile was a crisis to come that would reverberate around the world. It still hasn’t happened.
China’s government controls the money supply
Because China’s government is controlling the money taps, it is giving itself the time to sort out the mess, goes one argument as to why this isn’t a crisis. Another argument is that the debt is all contained within China, and so while there will be an economic impact from a Chinese credit crisis, it’s unlikely to result in a new global financial crisis.
But can China’s government solve the issue at the same time as sticking with its ambitious economic growth targets? It has taken some steps to try and deal with the debt problem. It has announced plans to ease the corporate debt burden through a series of so-called debt-for-equity swaps - essentially turning the debt into shares and pushing the risk onto shareholders rather than the debt holders – but these had limited impact and didn’t stop the overall debt burden from increasing.
Impending crisis or not, the debt mountain is real and China’s government is going to have to do something about the steep growth in indebtedness. It’s one to watch.