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China facing full-blown banking crisis, world's top financial watchdog warns
Keywords: China Economy, China Debt, China Debt To Gdp, ,
The Bank of International Settlements warns that China's "credit to GDP gap" is 30.1. A figure of 10 normally is considered to be high and needs watching. The People's Daily carried an article presumably by president Xi Jinping warning about the consequences of the debt that had been growing "like a tree in the air." The debt to GDP ratio was at 255% at the end of 2015, and is up 107% since 2008 when the financial crisis led to a huge stimulus that has accelerated debt growth. The corporate debt is at 171% of GDP. The article in the People's Daily warned about reflexive stimulus every time growth slows and said that China cannot any longer "force economic growth by levering up." Cross border liabilities is one area of progress falling by a third to $698 billion, as companies cut debt quickly before the U.S. Federal Reserve raises rates. In the future China is more likely to roll over debt as Japan had done following its debt surge and bad debt with zombie companies, which would in turn lead to lower growth. In the past the government was able to absorb the growing debt because it was not as high as it is today, and the economy was growing rapidly. This is no longer the situation, the reason for alarm at the situation facing China. A spike in interest rates of 250 basis points is cited as one situation which could affect China adversely.
Fitch Ratings analyst Charlene Chu's analysis of China's shadow banking and unreported private debt
08/01/2010
CHina's private debt is over twice China's GDP according to Fitch Ratings analyst Charlene Chu
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As the debt is run up it takes more units of borrowing to create one unit of investment. Over 4 units of borrowing in 2015 compared to less than 2 units of borowing before 2007, is what it now takes to create one unit of investment, according to JP Morgan. Where this adds to the glut in building or if its just a pet project or dream of city mayors the productivity of the investment is much lower, with additional risks in borrowing. And the collateral to support it of land sales is now increasingly unreliable with developers making cuts as property markets are slowing. The central government fearing slowing growth is pushing problems down the road, say experts. The IMF estimates that local government debt will reach 56% of GDP by 2019. The danger is that this will depress China's growth to below 5-6% in coming years witht a lot of the new borrowing simply going to rollover old loans, a situation Japan faced in the 1990's when the expression zombie loans was coined. This has implications for major manufacturing exporters Germany, Japan, the U.S., and for commodity exporters Australia, Canada, Brazil, S. Africa, Chile, which may look to India, Indonesia and other developing countries for exports.
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The debt of local governments estimated at between 27% of GDP by Dragonomics and the China's National Audit Office, to a much larger 42% by Prof. Shih of Northwestern University.
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The caution in raising rates of the U.S. Federal Reserve in 2015 and memories of the emerging market crisis in 1997
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In 1997 Federal Reserve rate increases worsened the situation in the fragile Mexican economy, with Mexico needing a large bank bailout. Contagion to other countries was also a large problem at the time. Harvard economists Kenneth Rogoff and Larry Summers, cite the situation facing emerging markets with the sharp fall in commodity prices and the decline in the value of the currencies, particularly Brazil, Indonesia and Russia, countries dependent on commodity exports, creating risks in the global economy that the Fed could not ignore. The debt crisis in China and slowing economy, with missteps by the government in handling the stock market decline, happened in August-September 2015, creating added uncertainty- making Sept 15, 2015, too soon for the Fed to risk even a modest 0.25% increase in rates.
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Kenneth Rogoff on the financial crisis in China with debt exceeding 270% of GDP, shadow banking, real estate bubble and unsustainable local government finances
08/24/2015
Kenneth Rogoff of Harvard, is an expert on financial and debt crises, with the most extensive quantitative study of debt crises of 66 countries with Carmen Reinhart. The research is published in the book, "This Time Is Different." He discusses the debt crisis in China with the NYT's Andrew Ross Sorkin, saying China is not immune to the problems from an alarming buildup of debt. He says the reason China was seen as impervious to debt problems is because of the high savings rate of 30%, the millions of migrants moving to cities for manufacturing work, and government control of markets. Actually he sees China as a really good example of "This Time Is Different," the notion that somehow it can't happen here. The result is along delay before an event and the sudden speed of the implosion once it hits. The effects Rogoff sees are the risks to commodity producing countries such as Russia, Brazil, and other countries dependent on exports. He says China's large foreign exchange reserves offers a way for it to manage the debt crisis.
Grouped Articles
A Warning on China Seems Prescient
New York Times 08/24/2015
China facing full-blown banking crisis, world's top financial watchdog warns
The Telegraph 09/19/2016
Will Trump herald a US economic boom?
The Guardian 12/07/2016
China’s Economy Grows 6.9%, but Warning Signs Persist
The New York Times 04/17/2017
Moody’s Cuts Its China Rating for the First Time Since 1989
WSJ 05/24/2017
In Downgraded China, Echoes of Japan’s Boom and Bust
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China's $586 billion 2008 Stimulus package and the resulting debt overhang that the Jinping administration hoped to ease through the equity market
07/09/2015
The effort appears to have failed leaving companies as dependent as before on the bank loans. The surge
Grouped Articles
China’s Stock-Market Woes Trace Roots to Earlier Stimulus
Wall Street Journal 07/09/2015
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China facing full-blown banking crisis, world's top financial watchdog warns
The Telegraph 09/19/2016
Moody’s Cuts Its China Rating for the First Time Since 1989
WSJ 05/24/2017
China's local government debt poses a risk for the economy
06/17/2010
China's local government debt is estimated to be in the range of 27% to 42% of GDP. Loans by banks to local government financing vehicles face high risk of default.
Grouped Articles
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Wall Street Journal 05/24/2013
China's 'Shadow Banks' Fan Debt-Bubble Fears
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I.M.F. Tells China of Urgent Need for Economic Change
New York Times 07/17/2013
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Wall Street Journal 09/08/2013
China Think Tank Offers Reform Wish List
Wall Street Journal 10/30/2013
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