China: Rising Debt Levels a Concern - BNZ
Jason Wong, Currency Strategist at BNZ, suggests that one of the key
emerging risks in China is the extent of leverage in the economy.
“Credit growth has exploded since the global financial crisis. This has been part of the government’s strategy to encourage economic growth. However, as leverage has expanded, every additional dollar of extra credit now leads to less economic growth.
Bank assets (excluding required reserves) as a percent of nominal GDP currently sits at over 260%, which would be considered high by developed country standards, let alone for an emerging market. The bulk of this (around two-thirds) reflects loans to corporates. While the level of debt is high, perhaps the greater worry is the rapidity of that credit growth, which inevitably comes at the expense of the quality of loans. Official PBoC data on non-performing loans remains low at less than 2%, but that likely significantly understates the looming bad debt issue.
China’s main banks are still largely state-owned and there is capacity for the government to “take over” the debt on its balance sheet, but doing so threatens the government’s own fiscal position and reduces its policy options to help guide the economy.”