World Economy

China Facing Mountain of Debt

China Facing Mountain of DebtChina Facing Mountain of Debt

China’s debt mountain is casting a shadow over the world’s second-largest economy. Total debt has reached 282 percent of GDP, according to the McKinsey Global Institute. While other big economies aren’t far behind, it’s the pace of China’s credit expansion that’s worrying policy makers, spurring targeted stimulus strikes while trying to avoid a debt sugar hit.

Central government debt is low by global standards, giving room for fiscal stimulus if the economic downturn deepens. Local authorities are in a more delicate position, having borrowed heavily via vehicles after the global financial crisis and now grappling with repayments, Bloomberg reported.

While bank debt doesn’t flash red alert yet, rising bad loans signal more pain to come. For non-financials, especially real estate developers, the burden is greater, raising question marks over whether monetary policy loosening will spur a pickup in loan demand among already tapped out corporates. Last month, Baoding Tianwei Group, a power-equipment maker became China’s first state-owned enterprise to default on domestic debt.

  Good News

Now on to the good news: households. China’s famously frugal citizens have plenty of scope to take on more credit, spurring hopes consumption can help plug a growth gap that’s widening amid the slowdown in investment.

As for who dished out the loans, an estimated 30 percent comes from the shadow banking system -- a lending channel policy makers are trying to rein in due to concerns over transparency. Then there’s foreign lending, which could come back to bite if the currency weakens. Even after a slight decrease in the fourth quarter of 2014, outstanding claims on China totaled $1 trillion at the end of 2014, well ahead of $308 billion for Brazil and $196 billion for India, according to the Bank of International Settlements.

There are signs that credit has peaked, with Standard Chartered estimating China’s debt-to-GDP ratio is stabilizing. The question for policy makers: will the deleveraging process spark a crunch or can they pull off a smooth landing?

“China’s policy makers need to walk a fine line between supporting growth and avoiding a further deterioration in debt metrics,” said David Mann, chief Asia economist at Standard Chartered. “They don’t want to let that genie back out of its bottle.”

  Export Downside Risk

China’s exports unexpectedly declined in April and imports slumped, adding downward pressure on an economy grappling with overcapacity and waning competitiveness.

Overseas shipments fell 6.2 percent from a year earlier in yuan value, the customs administration said in Beijing on Friday. That compared with the median estimate for a 0.9 percent rise in a Bloomberg survey of analysts. Imports slid 16.1 percent -- the fourth straight double-digit decline -- leaving a trade surplus of 210.21 billion yuan ($33.9 billion).

 “Exports, once regarded as a stabilizer for growth this year, are now becoming a downside risk,” said Li Wei, the China and Asia economist for Commonwealth Bank of Australia in Sydney. “The government has to do more to help growth.”

While Chinese exports to the US rose 9.2 percent in the January to April period in yuan terms, exports to the EU dropped 0.7 percent and shipments to Japan tumbled 12 percent, according to China’s customs administration.

Exporters in the Pearl River Delta manufacturing hub (in Guangdong province of China) are facing persistent labor shortages and rising wages, according to a survey of manufacturing clients by Standard Chartered Plc. The nation’s 274 million migrant workers, the backbone of China’s labor-intensive manufacturing industry, are getting older and more expensive, with their average age increasing to 38.3 years in 2014 from 35.5 five years earlier, according to a quarterly survey from the National Bureau of Statistics.