China’s total debt rose to a record 237% of gross domestic product in the first quarter, far above emerging-market counterparts, raising the risk of a financial crisis or a prolonged slowdown in growth, economists warn.
Beijing has turned to massive lending to boost economic growth, bringing total net debt to Rmb163 trillion ($25 trillion) at the end of March, including both domestic and foreign borrowing, according to Financial Times calculations, CNBC reported.
Such levels of debt are much higher as a proportion of national income than in other developing economies, although they are comparable to levels in the US and the eurozone.
While the absolute size of China’s debt load is a concern, more worrying is the speed at which it has accumulated—Chinese debt was only 148% of GDP at the end of 2007.
“Every major country with a rapid increase in debt has experienced either a financial crisis or a prolonged slowdown in GDP growth,” Ha Jiming, Goldman Sachs chief investment strategist, wrote in a report this year.
The country’s present level of debt, and its increasing links to global financial markets, partly informed the International Monetary Fund’s recent warning that China poses a growing risk to advanced economies.
Returns Spiraling Downwards
Economists say it is difficult for any economy to deploy productively such a large amount of capital within a short period, given the limited number of profitable projects available at any given time. With returns spiraling downwards, more loans are at risk of turning sour.
According to data from the Bank for International Settlements for the third quarter last year, emerging markets as a group have much lower levels of debt, at 175% of GDP.
The BIS data, which is based on similar methodology to the FT, put Chinese debt at 249% of GDP, which was broadly comparable with the eurozone’s figure of 270% and the US level of 248%.
Beijing is juggling spending to support short-term growth and deleveraging to ward off long-term financial risk. Recently, however, as fears of a hard landing have intensified, it has shifted decisively towards stimulus.
New borrowing increased by Rmb6.2 trillion ($954 billion) in the first three months of 2016, the biggest three-month surge on record and more than 50% ahead of last year's pace, according to central bank data and FT calculations.
Risky Situation
Economists widely agree that the health of the country's economy is at risk. Where opinion is divided is on how this will play out.
At one end of the spectrum is acute financial crisis—a "Lehman moment" reminiscent of the US in 2008, when banks failed and paralyzed credit markets. Other economists predict a chronic, Japan-style malaise in which growth slows for years or even decades.
Jonathan Anderson, principal at Emerging Advisors Group, belongs to the first camp. He warns that banks driving the huge credit expansion since 2008 rely increasingly on volatile short-term funding through sales of high-yielding wealth management products, rather than stable deposits. As Lehman and Bear Stearns proved in 2008, this kind of funding can quickly evaporate when defaults rise and nerves fray.
"At the current rate of expansion, it is only a matter of time before some banks find themselves unable to fund all their assets safely," Anderson wrote last month. "And at that point, a financial crisis is likely."
