How much debt China can bear? - Finance & Markets - morningwhistle
Credit can stimulate economic growth; a rising economy encourages more borrowing. With China’s economy certainly showing signs of slowing, maybe it’s time for the dragon to think about how to deleverage.
The debt burden piled up during the global economic crisis does pose a risk. As Tom Orlik at the Wall Street Journal writes:
The ratio of credit to gross domestic product ballooned from about 134% in 2008 to 173% at the end of 2011. That helped save China's economy from the worst of the global financial crisis. But it also brought its own problems—inflation, a real-estate bubble, and the risk of bad loans in the banks. Now the trend is unwinding.
Chinese experts also see a problem “extremely” high corporate debt ratios pose.
Li Yang, deputy head of the Chinese Academy of Social Sciences, a government think tank, told the official China Daily the nation’s China's total debt to GDP ratio is 168.9 percent, a "healthy" figure considering that the global average is 200 percent, and is 500 percent in some large economies.
"But debt among enterprises amounts to 105.4 percent of GDP, which is the highest compared with other countries such as the United States and Japan, "Li said, adding the figure far exceeds the generally accepted safety ceiling of 80 percent.
Rising capital cost have also diminished enterprises’ profits, putting a strain on the real economy, according to Orlik:
Total interest expense for China's corporate sector was up 41% year-on-year in the first quarter. Meanwhile, the average return on invested capital for mainland-listed firms fell to 6.7% in 2011 from 11.6% in 2007, according to numbers from Chinese data provider Wind. With the benchmark one-year lending rate currently at 6.6%, the smart choice for many firms is not to borrow.
Small and medium-sized enterprises are the main source of employment and a main driver of economic growth. If they really stall, problems can amplify.
Unlike its Western counterparts, the Chinese government can take advantage of centralized state power and has ample room to deleverage, Orlik argues:
The government has options for responding. It could further lower the reserve requirement ratio, which would encourage firms to take on more loans as it lowers the cost of capital and signals that the government intends to keep demand on track—buoying confidence about future orders and profitability.
A further step would be to relax the floor on lending interest rates. China's banks are currently allowed to lend at a discount of up to 10% to the government-set benchmark. People's Bank of China governor Zhou Xiaochuan said in April that the next step in interest rate reform could be liberalizing the lending rate—suggesting the floor could be lowered.
Beijingalso has room to ratchet up its own spending. There are signs that this is already underway. Investment funded from the state budget grew 29% year-on-year in the first four months of this year, partially offsetting a meager 4.2% increase for investment financed by bank lending.