The upside is fake stability. The downside is too ugly to contemplate.
Corporate debt in China has soared to $18 trillion, or 169% of GDP, the largest pile of corporate debt in the world, according to the worried Bank for International Settlements. The OECD has warned about it earlier this year. The New York Fed warned about this debt boom in February and that it could lead to a ‘financial crisis,’ but that authorities have many tools to control it.
The IMF regularly warns about China’s corporate debt, broken-record-like, and did so again a few days ago, lambasting the authorities for their reluctance to tamp down on the growth of debt. The ‘current trajectory,’ it said, ‘could eventually lead to a sharp adjustment.’
The Chinese authorities – the government and the central bank, supported by the state-owned megabanks – have allowed some bonds to default, rather than bail them out, to make some kind of theoretical point, and they have been working furiously on a balancing act, tamping down on the credit growth that fuels the economy and simultaneously stimulating the economy with more credit to keep the debt bubble from imploding. A misstep could create a global mess.
‘Everyone knows there’s a credit problem in China, but I find that people often forget about the scale; it’s important in global terms,’ Charlene Chu told the Financial Times. Back in 2011, when she was still a China banking analyst at Fitch Ratings, she went out on a limb with her radical estimates that there was much more debt than disclosed by the central bank, particularly in the shadow banking system, that banks were concealing risky loans in off-balance-sheet vehicles, and that this soaring opaque debt could have nasty consequences. Her outlandish views at the time have since then become the consensus.
This post was published at Wolf Street on Aug 17, 2017.