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Quick and easy access to credit has encouraged many young Chinese to go into the red to buy cars and apartments they could not otherwise afford.
Quick and easy access to credit has encouraged many young Chinese to go into the red to buy cars and apartments they could not otherwise afford.

Borrowing Binge Threatens China

Total debt of government, non-financial corporates and households had already reached 256% of GDP at the end of last year and it was still growing

Borrowing Binge Threatens China

China is borrowing to finance 40% of its economic growth and the debt surge is fuelling concern about the financial and economic stability of the world’s second-largest economy.
Moody’s decision to downgrade China’s credit rating last week had little effect on bond or commodity markets as investors were already keenly focused on the risks in China’s growth model, news outlets reported.
The rising bad debts could generate a credit squeeze that would choke growth, despite the state’s control of the big banks. Moody’s argues that China’s potential growth rate is falling for three structural reasons.
Its capital stock is rising more slowly as investment accounts for a diminishing share of total spending.
The fall in the working age population, which has totaled 8.6 million people in the last two years, will accelerate. World Bank forecasts a 10% fall in the working age population over the next 25 years.
Finally, Moody’s is concerned about the decline in China’s productivity growth, which was rising at double-digit levels until 2010, is now down to about 6%. Moody’s expects no early reversal.
The agency believes these structural forces are dragging China’s sustainable growth rate below the level being targeted by the government, which currently stands at about 6.5%. Moody’s says the government believes strong economic growth is essential both for fulfilling the five-year plan and for maintaining economic and social stability and says they are meeting the target by boosting lending.

Rise in Lending
Total debt of government, non-financial corporates and households had already reached 256% of GDP at the end of last year and it was still growing.
The University of Peking’s finance professor Michael Pettis says the seven trillion yuan ($1.4 trillion) increase in lending to government, non-financial business and households in the first three months of the year was equivalent to 39% of its nominal economic growth in that period.
He says lending through the shadow financial institutions would add a further 5 to 10 percentage points of debt to GDP to the total expansion of credit in the quarter. Pettis says that “mind-boggling” amount of debt was required to lift China’s growth rate by 3 to 4 percentage points above the sustainable growth rate.
While part of the increased lending was used to roll over bad debt that is not being recognized, most of it went to fund a 13.6% increase in public sector investment, much of it unproductive.
Pettis argues the unsustainable debt burden will result in slow growth, rather than a financial crisis.

Young Chinese in the Red
Quick and easy access to credit has encouraged many young Chinese to go into the red to buy cars and apartments they could not otherwise afford, CNA reported.
They are the faces of China's growing addiction to debt, which along with government and corporate borrowing, has raised fears of a looming crisis and prompted Moody's ratings agency to slash the country's credit score last week for the first time in nearly three decades.
Household debt has become the major driver of China's credit growth, expanding by an average of 19% per cent a year since 2011, said Chen Long, an economist at Gavekal Dragonomics.
If it continues to grow at this pace, household debt would reach roughly 66 trillion yuan by 2020—more than double the current level—and potentially 70% of GDP versus 30% back in 2013.
Mortgages make up the bulk of household debt. Chinese have long favored putting their savings into bricks and mortar due to the low bank deposit rates on offer, volatility in the stock market and strict rules that make it difficult to invest money abroad.
But as apartment prices have soared—often doubling within a few years, particularly in major cities—fears of a real estate bubble have mounted.
The government has responded by periodically tightening restrictions on property purchases and hiking minimum down payments—up to 80% for a second home in Beijing, according to state media—to stabilize the market.
But prices continue to rise, forcing young homebuyers deeper into debt.

 

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