China Research

Recently, I read again that more skeptical analysts nowadays exaggerate their concerns about China. These words came – not very surprisingly – from a prominent hedge fund manager. I guess that this guy never had looked somewhat deeper into the Chinese debt problem.

I easily can agree that Chinese non-performing loans are a conundrum. However, the risks are most probably much more on the worse side than to the better. The Chinese have a gigantic debt problem which has been increasing during and in the aftermath of the subprime crisis to unsustainable levels, currently 200 percent according to official estimates and may be around 250-260 percent of GDP according to private sources. Nobody knows the exact number because of unclear definitions of loans, unknown local debt amounts in reality, implicit central government debt and hidden credit volumes of the shadow banks. I feel worried about this black box, particularly when considering that the above-mentioned credit ratio in 2008 still was as low as around 115 percent.

The credit boom contributed to artificial or doped GDP growth in the past seven years or so which certainly cannot be maintained anymore. Still, financing Chinese debt is not in danger since the money is created domestically without net borrowing abroad (as a result of the positive balance on current account). But what happens the day when China possibly cannot create surpluses in the current account anymore and/or the capital balance has been widely or completely deregulated? In a bad or worst case scenario – with free cross-border capital movements and debt crisis – bank refinancing could become much more difficult or even impossible.

There are, consequently three major risks arising from the Chinese credit boom:

¤  reduction of GDP growth if/when credit growth is slowing down,

¤  delayed or even strongly reduced deregulation plans of the cross-border capital balance and other financial reforms,

¤  explosion of an asset price bubble (property markets?).

Sure, nobody knows the end of this story. In my eyes, however, the analysis of the Chinese debt problem is widely a malign neglect, supported by the obviously too politically driven – quite benign – China analysis of the IMF.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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