It’s been clear from the signals emanating from China that the country’s leaders will take a tough line on tackling its debt mountain. The latest is the concern expressed by People’s Bank of China’s governor Zhou Xiaochuan over risks posed by the high leverage in the economy.
In an essay published on the PBOC’s website, Zhou, as he nears retirement, warned of “hidden, complex, sudden, contagious and hazardous,” dangers lurking in the world’s second-largest economy. As the preoccupation with the Communist Party’s twice-a-decade congress now out of the way, policymakers may further tighten the noose around China’s free-wheeling lending practices, shadowy wealth-management products and over-easy property loans.
Government-led stimulus has been a key driver of China’s growth since late 2008. Along with that, the country has also built up a mountain of debt at nearly 300% of gross domestic product (GDP) compared with around 140% before the global financial crisis.
Driven by low interest rates, the major driver of China’s credit growth has been household debt, expanding by an average of 19% a year since 2011. At this pace, it could more than double the current level and potentially be 70% of GDP by 2020 versus 30% in 2013.
The banking sector has ballooned, too, with wealth management products tripling to $3.8tn as they offer higher yields. The rapid unwinding of trades funded with margin debt fuelled the $5tn equity market slump in 2015.
The trillion-dollar Belt and Road (also known as Silk Road) plan, the centrepiece of a soft-power push by President Xi Jinping – who may be the strongest Chinese leader since Chairman Mao in 1976 – also raises fears. More than $250bn in China’s overseas investments failed between 2005 and 2015, according to the American Enterprise Institute and the Heritage Foundation.
Chin’s slowing growth has raised concerns that years of risky lending could lead to a disaster worse than the US sub-prime collapse. 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.
Looking beyond the negative headlines, there are signs of fundamental changes at the highest levels. After decades of focus on hitting growth targets delivered breakneck expansions accompanied by fouled air and water, a shift toward more balanced development for the economy is more conspicuous now than ever. The Communist Party of China has added Xi’s initiatives to its guiding principles, along with greater environmental protection and emphasis on quality over quantity.
A Chinese financial crisis, which doesn’t look imminent, will be a massive shock to the global economy, according to a QNB analysis in September.
It’s tricky to get a clear picture of what’s happening in any fast-changing country like China. A lack of trust in the country’s opaque economic data and a dearth of communication about policy decisions are not helping, too.
But everyone – from investors to central bankers and executives – has plenty of compelling reasons to strain to understand China’s policies.
How China’s $10tn-plus economy fares, undoubtedly, is a global concern.
