China's Debt_ China’s Debt Bomb

THE WALL STREET JOURNAL

China’s Debt Bomb

Stock volatility is the latest sign of the economy’s excessive leverage.

Photo: An investor observes stock market at a stock exchange hall on June 26 in Fuyang, Anhui province of China. Photo: ChinaFotoPress/Getty Images

June 28, 2015 5:07 p.m. ET
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The spectacular volatility in Chinese stocks the past two weeks is a reminder that, for all its size, China remains a developing economy with an immature financial system. As stock prices soared more than 100% in the past year, so did margin lending, estimated at $238.5 billion last week. That debt probably added to the price swings, with the Shanghai Composite Index down 19% since June 12 and 7.4% on Friday.

Property developers, local governments and state-owned enterprises are also broadly overleveraged. Despite Beijing’s attempts to rebalance the economy from investment to consumption, inefficient borrowing continues to expand. So how concerned should the world be about Chinese debt?

A recent McKinsey Global Institute report put total borrowing—by individuals, companies and government—at 282% of GDP in 2014. That’s extraordinarily high for a developing economy, and up from 158% of GDP as recently as 2007. After the 2008 financial crisis, Beijing encouraged Chinese banks to lend to local governments and state-owned companies.

The cheap credit with few controls often financed projects with a low or negative rate of return. The wasteful investment is reflected in China’s falling incremental capital output ratio, one measure of how efficiently borrowing translates into economic activity. In the five years before the 2008 panic, it took an increase of less than 3% in investment to add 1% of GDP. By 2012 it took 4.9%. China’s debt figures are reminiscent of Korea, Indonesia and Thailand in the runup to the 1997 Asian financial crisis.

Beijing is trying to defuse the problem, though some of its steps may make it worse in the long-term. The People’s Bank of China (PBOC) is bailing out local governments responsible for bridges to nowhere and palatial buildings. Provincial governments will retire bank debt by issuing $419 billion in bonds to be bought by state banks, which will swap them with the central bank for reserves to lend.

This repeats the bank recapitalization of the late 1990s, when bad loans were warehoused and largely forgotten. By failing to liquidate bankrupt borrowers, the government creates a moral hazard in which neither loan officers nor local officials face the consequences of bad decisions.

Meanwhile, Beijing has encouraged the rising stock market as a way to boost the slowing economy. This allows new companies to list shares and brings down business leverage. But some managers have taken the opportunity to borrow more on the back of their higher market value. Combine that with margin lending to speculators, and the bull market may have increased systemic risk.

If there’s a bright spot, it’s the PBOC’s moderate monetary policy. It has cut rates and freed up some liquidity, but the central bank has not reopened the money taps as it did in 2009, when real deposit rates were negative and real lending rates were near-zero.

The GDP deflator fell 1.2% in the first quarter, only the second time this has happened. The interest rates most companies pay on loans are higher than the nominal GDP growth rate of 5.8% in the first quarter, and real rates are even higher. The PBOC has room to ease further, but it’s positive for China in the long run that borrowers need to find investments with a healthy rate of return to service debts.

As long as Beijing resists calls for too aggressive monetary stimulus and gets tough on bankrupt borrowers, it still has the capacity to defuse the debt bomb. Bad habits are always hard to break, but that’s all the more reason to introduce market discipline now.

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Chân thành cám ơn Quý Anh Chị ghé thăm "conbenho Nguyễn Hoài Trang Blog".
Xin được lắng nghe ý kiến chia sẻ của Quý Anh Chị trực tiếp tại Diễn Đàn Paltalk: 1Latdo Tapdoan Vietgian CSVN Phanquoc Bannuoc . 
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