China is one of the most indebted countries worldwide. Total debt hits 282% in 2015 according to McKinsey Global Institute. After decades of growth and export the people’s republic do not want to be an emerging nation anymore. The government supports raising wages and a growing service industry sector more than general growth, export records and wage dumping. One of the most successful emerging nation wants to be an industrialized country. China is making big steps to be a free enterprise and to change their economy concept. But the huge sum of debt strangulated the country.

There were decades of worriless growth. Chinese economic strongness (GDP) raised from $1.2 trillion in 2000 about 800% to $10.9 trillion in 2015. Debt has been used to boost growth and exports. Governmental debt raisend more than 1.000% from $460 billion in 2000 to $5.5 trillion in 2016. While China’s government is running in debt because of household deficits there is enough swing. There are over $1.3 billion reserve assets invested in US government bonds. The republic is run up 51% in debt related to the GDP. Just 18% of chinese total debt of $30.7 trillion (282% of GDP) is made by the government. More disturbing are the data of other chinese sectors:

  • RLG (regional and local governments) owe $3.7 trillion in the end of 2014 (38% of GDP)
  • Households owe $4.1 trillion in 2015 (38% of GDP)
  • Financial institutions owe $7.1 trillion in 2015 (65% of GDP)
  • Non-financial corporate owe $14 trillion in 2015 (145% of GDP)

xcvxccyxcLocal government are normally not allowed to lend money from banks. Only the central government owe $500 billion 2000. Since 2002 Local Government Financial Vehicles (LGFV) were founded. Today there are more than 10.000 LGFV’s existing in china. LGFVs are state-owned companies that raise funds for local governments. Since 2009 it is possible for regional governments to run up in debt. Today 51% of the $5.5 trillion debt are hold by local governments. Since 2014 the government increased the speed of running up in debt.

The government needs to stabilize the country. The economy (represented by households, financial institutions and non-finacial corporate) is overindebted. All together owe $25 trillion. Most loans are toxic. They will never be payed back. But the country is changing. The old system of lending money to boost growth has stopped and now they are looking for a new structure to become a free enterprise. It will be crucial if they can do it smoothly or if China has to crash down to restart. The economy has no more space to act. Most of the individuals and institutions are overindebted. They need to pay back loans. That will have a big impact on the GDP growth. Consumption, demand and production will decline because money will be used to pay money back and not to be invested in growth. If these market activities decline the sales will decline, too. The most indebted sector, the non-financial corporate, will have serious trouble when they need to pay back money but revenue is declining.

They change in China is risky and unsteady. It will be interesting and important to watch how they perform. There are serveral projects the government started to support the economy:

  1. According to Financial Times China allowed banks to do debt equity swaps.
  2. According to Bloomberg chinese Banks turn toxic debt into securities.
  3. According to Bloomberg China started to Bail Out most of the banks.

“Instead, Beijing seems to be praying to the Keynesian multiplier, hoping that with yet more stimulus it can grow its way out of its problems, much as it did a decade ago. But the post-2000 period was a unique one, as China joined the World Trade Organization, global growth pushed up export receipts and budgets magically righted themselves. The government must accept that history is unlikely to repeat itself.

If it doesn’t, mounting bad debts, double-digit deficits and a rickety financial system are going to make for an increasingly volatile combination. Bearish investors predicting large-scale devaluations and bank crises understand the risks that have historically accompanied such profligacy. If China’s credit can’t expand forever, it must stop — either by choice or by force.” – Bloomberg View (Christopher Balding)

The IMF calculated that there could be $2.9 trillion high-risk loans in china. This would be 9.4% of the total debt sum. Source: Bloomberg

Sources:

Bloomberg Marktes – China’s very high mountain of debt

Bloomberg – Chinese Investors balk at company bonds from riskiest province

Bloomberg – China bank to turn $1.6 billion debt into securities

Godmode Trader – Wer kauft US-Staatsanleihen?

CNBC – Moodys: China debt a risk but authorities are handling it

Moody’s Investors Service – RLG debt, negative rise in leverage

Trading economics – china government debt to GDP

National debt clock of china

Bloomberg View – Why china can’t solve ts debt problem

Financial Times – IMF sounds warning on China’s corporate debt

OEC – China Import and Export

Bloomberg – UBS: China’s already started bailing out its banks

International Business Times – China’s LGFV

Nikko Asset Management – China’s LGFV debt swap