20-06-2016, 04:55 PM
(20-06-2016, 02:03 PM)shadow_walker Wrote: [ -> ]Agree that it is important not to look at overall debt figures as there are many other considerations, just like a bank may be highly leveraged but a commodity companies with 100% gearing might be more prone to bankruptcy.
Both government and consumer debt are around 50% of GDP each. It is the corporates that are highly leveraged. However, lets consider a few points:
1) High debt to gdp is a red flag if there is huge amount of foreign debt. Think AFC, latam debt crisis. It is not that much of an issue if the debt is financed internally, for e.g. Japan whose high govt debt is financed by citizens. Foreign debt is dangerous because these hot money can flow out fast in addition to the depreciating currencies.
2) The bulk of the corporate loans are made by SOEs and LGFV. The bulk of the loan providers are the state-owned banks. Shadow banking size has dropped quite a lot since 2013. Therefore, it is essentially left pocket to right pocket. If your wife and children borrow $500k from you, are they considered at high risk of bankruptcy?
3) Chinese has high saving rates and the government has huge reserve. Capital flow is still controlled although not 100% tight.
I think the key issue with the debt is that they are supporting lots of overcapacities, uncompetitive companies and industries which should have been shut down by normal economics and will not have access to financing normally. Private companies find it hard to thrive with limited access to financing. Bond default is a healthy development in China given the moral hazard of an implicit government guarantee.
I fully concur with your view. The borrowers and banks are mainly owned/controlled by state gov, and debts are mainly domestic ones in RMB. The key issues are the over-capacities in few industries, and the efficiency of the debt, in term of nos of Yuan in debt, to increase one Yuan of GDP.
Great post, indeed. Thank you
