China’s debt mountain is still standing tall, but it may not be as menacing as it looks.
From turbulence in the corporate bond market to last month’s sovereign rating downgrade by Moody’s Investors Service, there’s been no shortage of bad news when it comes to China’s massive debt pile.
Government-led stimulus has been a key driver of China’s economic growth since late 2008. Along with that, the country has also built up a mountain of debt at nearly 300% of gross domestic product compared with around 140% before the global financial crisis. The corporate debt load has swelled to an estimated $17tn last year, or 156% of GDP.
The trillion dollar Belt and Road (also known as Silk Road) plan, the centrepiece of a soft-power push championed by President Xi Jinping, also raises fears. More than $250bn in China’s overseas investments failed between 2005 and 2015.
But looking beyond the negative headlines, one encouraging fact stands out: China’s biggest companies are healthier than they’ve been in years. The market capitalisation-weighted average debt-to-equity ratio at China’s 100 biggest non-financial businesses dropped to 68% at the end of last year from 72% in 2015, according to Bloomberg data. Profit margins and interest coverage ratios also improved, while free cash flows for the group swelled to a record $93bn.
The pickup in economic growth has helped big companies to repair their balance sheets. China’s GDP increased 6.9% in the first quarter from a year earlier – the first back-to-back acceleration in seven years – as investment, retail sales and factory output all strengthened.
The improvements could help ease fears of a looming financial crisis in the world’s second-largest economy, even though smaller Chinese companies have made less progress so far.
The Bloomberg data, however, exclude unlisted borrowers and heavily-indebted local governments. The improvements at big public companies are temporary – the result of economic pump-priming before a leadership reshuffle in the ruling Communist Party towards the end of this year, say sceptics.
The economy’s strong start to 2017 has already shown signs of levelling off. Moody’s expects growth to slow to around 5% in coming years, saying the economy will, however, remain robust and the likelihood of a hard landing is slim.
The government is targeting GDP growth of around 6.5% this year.
It’s clear, for sure, from the signals emanating from the country that China’s leaders know what the problems brought about by the country’s economic maturation are. But it’s not clear how far they are willing to go to fix the system, or let it fix itself. A lack of trust in China’s opaque economic data and a dearth of communication about policy decisions are not helping, too.
It’s tricky to get a clear picture of what’s happening in any fast-changing country. But everyone – from investors to central bankers and executives – has plenty of compelling reasons to strain to understand China’s economy.
In a wider sense, how China’s $10tn-plus economy fares is no longer an internal issue, but one with dire consequences across the world.
