China’s Coming Debt Crisis?

The condition of the Chinese economy is increasingly becoming a significant factor exorcising the minds of global policy makers. Even though China’s most recent data has shown signs of stabilization (and the current turmoil in the Chinese market will likely provide more Chinese policy stimulus via further overinvestment, which could perpetuate this capex bubble in the short term) the world is still paying close attention to the gradual unwinding of the country’s historically unprecedented investment ratio of around 45% to GDP. That ratio (down from a peak of 55%) suggests that China is poised to embark on a powerful accelerator multiplier dynamic to the downside. Add to that ongoing dollar strength, which has inflicted further deflationary pressures on resource producers, most particularly those who have borrowed dollars against declining resource revenues, all of which has put pressure on commodity prices.

Is this the domino that can bring down the global economy? What is the nature of the debt? How much is private? Public? How much of it is foreign denominated (a germane consideration, considering the recent weakening of the Chinese currency)? As Professor Yan Liang, a professor of economics at Willamette University, has noted in her research on the country, China's growth model has relied on credit driven, investment led growth in the past decades. Its double-digit growth record has been nothing but impressive. However, this growth model has encountered mounting difficulties and China today is wresting with a vexing problem with debt. A high level debt, coupled with declining quality of debt, has rendered the private sector vulnerable; and yet, aggressive deleveraging could further decelerate the economy, producing a vicious “credit spiral”.

So what are the numbers? According to Professor Liang, China's debt to GDP ratio has reached 217% of GDP (or 281% of GDP, if financial sector debt is included) in mid-2014, up from 134% in 2007. This level is rather unprecedented despite China’s long tradition of credit driven growth. Since China’s market reform in the 1980s, State Owned Commercial Banks, the backbone of China’s financial system, have lent generously to State Owned Enterprises (SOEs) to finance the latter’s fixed asset investment. Credit extension helped mobilize resources and facilitate China’s industrialization and urbanization, whereby engendering a Keynesian-Schumpeterian credit-investment-growth cycle. But this model has gradually run out of steam, as it causes debt accumulation, puts a heavy toll on natural resources and generates rising supply glut in recent years. Chinese policy makers have realized the limitation of the growth model and called for rebalancing, shifting demand from credit driven investment and export to consumption. However, the rebalancing plan did not effectively bring about a reduction of debt; rather, leverage heightens and debt continues to accumulate. In the interview below, Professor Liang discusses the challenges facing China and the prospects of managing a challenging "soft landing" that doesn't engender a major global economic calamity.

[prnewbie]

Great interview she was very balanced and factual. For those saying she was sounding the death knell, watch the last 5mins. She didn't see China's debt as a problem the govt cannot solve.

[robfinn]

There are 64, 000, 000 empty apartments in China. The average Chinese worker cannot afford to purchase an apartment. Over 50 ghost cities and an empty mall that is the world's largest. You should have mentioned such factors in any economic discussion.

[gareth]

This is happening right now, incredible foresight

[lylecosmopolite]

I am convinced that many Chinese bank loans are not truly loans as you
and I understand them. They are equity participations with downside risk
but no upside potential. Paying loans back is subject to an unspokenn
rule: "pay what you can, when you can, as long as we have a seat on your
board of directors and can see your books." There are no firm Chinese
accounting rules requiring that state banks deem a loan nonperforming.
State owned banks are not answerable to shareholders. The Bank of China
stands behind any state owned bank hit by a run, by giving a state owned
bank all the currency it needs to satisfy panicked depositors. And what
will the Chinese do with their panic cash? Deposit it eventually, in
another state owned bank, that's what!
Mr Wong seems to believe that Chinese nonfinancial decision makers have
not invested in the best capital projects on offer. I am agnostic about
that claim. I prefer to say that over 2009-16, China invested
frantically even in situations when no project contemplated had a
positive net present value. Spending for equipment and structures adds
to GDP even if the investment cannot ever make a profit. I suspect that
Chinese accounting practices can be manipulated to disguise the fact
that a firm, public or private, is running at a loss.
I agree that a massive failure of corporate governance lies at the heart
of the looming Chinese crash.

[zeus-iohn]

omg she is vry honest lady. pro liang i like intel & honesty.

[davidhynes]

What will happens to China if the whole world stops buying Made in China.

[WallaceRoseVincent]

Great interview and fantastic info but nothing has happened. Sure markets can stay irrational longer than we can stay solvent ... but nothing has happened, even with a trade war.

[onceANexile]

THE BANKS SAW A BIG FOOL COMING AND LOANED THEM BIG MONEY....

[gregparrott]

Excellent, well balanced interview, one which counters some of the hyperbole about China's economy crashing. The interviewer should slow down a bit and provide a pause between completion of one answer and his posing of another question or injection of a comment.

[davidbaldwin]

If it does not hit now? When will it ever hit? Time for an update people as this is four years old.

[anarasi]

The interviewer is annoying. He keeps interrupting the speaker and seems more interested in making his own point.

[geoprzm]

It's July 2021. Where's that debt crisis ? Oh yea, China has 12% GDP growth for the 1st half of 2021 so we'll have to wait another 5 years for China to collapse.

[Ottovonostbahnhof]

To be honest, 2016 was a tough year for China as the Fed raise rates, Foreign investment outflow caused big trouble in stock market

[islandceo]

There were thousands similar interviews on Youtube like this in the past two decades. The first one as far as I can remember is Sir Chris Patten. He is a genius because he is the first one telling people these sort of things. Others are followers, in other words they are idxox!

[lylecosmopolite]

I submit that the Chinese GDP is overstated by as much as 10-15%. This means that all ratios of the form X/GDP are understated by as much as (1/0.85)-1 ~ 18%.

[koboldgeorge]

I genuinely don't understand all this fear mongering about Chinese debt levels. So they have 281% debt to GDP ratio? Well by the same metric the U.S.' debt to GDP would be, what, at least 500 or 600% right?

I think this is just busy bothering about the Chinese economy becoming more independent frkm the west and not being a client state for American manufacturing anymore.

[wangyuzhang]

I am here watching this video in June 2021 in China. Feel like It was a comedy talk show.

[loudradialem]

I think it's happening now!
Evergrande is collapsing! 😲

[UKinUSA-xxzo]

5 years later we are now seeing this all unfold

[jacindafelisia]

Private capital in China is the largest in the world standing at more than $23 trillion, more than double the second largest country, Japan, which has $10 trillion.
Home ownership in China is one of the largest in the world at 90%+ and the vast majority of the homes at more than 80% are paid up, unlike US as more than 50% of the homes are still on mortgage. In the 90s, when the Chinese government released out homes for sales to the public, the vast majority of the Chinese people took advantage of the very cheap homes given out by the government. In comparison, today's prices for those homes have risen by 7 to 10 times the value (depending on cities they are in). More Chinese people are chasing after second and third homes and the Chinese government has put in restrictions: for first homes, buyers have to put in 30% downpayment, and 50% downpayment for second homes and 70% downpayment for third homes, etc. Average savings rates of Chinese people stands at more than 40% (of their incomes), and many Chinese are still able to fork out the 30% for the first homes and 50% of the value of second homes. This alone shows how much liquidity the Chinese economy is flushed with.

In comparison of debt, China's government debt to GDP is 26% while US government's debt of $19 trillion is more than 100% of the $18 trillion GDP. Most western economists try to mislead with claiming that China's total debt is 240% of its GDP. What, then, is US total debt? That could be 500% of its GDP because the total debt of US, including its public debts and external debts, debts owed by all companies, banks, individual Americans, student loans, etc, would be much higher than the US government debts alone.
So, it is easy to claim that China's total debt is high without showing the amount of US total debt. The usual comparison, which is misleading, was to point out China's total debt while comparing them to only US government debt (which is a very small fraction of US total debt).