Monday, March 20, 2017

China's economy - caught in a debt trap?


As part of a wider analysis of Chinese-North Korean relations, Strategy Page looks at the impact of debt on China's economy.  It appears to be a far larger danger at present than military pressure from other states.

The most urgent threats to the government are economic. This is mainly about too much debt and how much of that debt is uncollectable (“bad” debt). To make matters worse Chinese banks are suspected of using the same deceptive banking methods (trying to repackage bad debt as good debt) that brought on the 2008 financial crises in the United States. That economic crisis went worldwide and the Chinese government was forced to use a lot of debt to keep the economy moving. But if too much of that debt is bad there is increased risk of an economic crises that would halt economic growth and take years to fix.

The government has made this worse by allowing economic data reporting to be “adjusted” to suit the needs of local (provincial) officials. That was bad enough (and is now being fixed) but during several decades of rapid economic growth this flawed data allowed the state owned banks (which still dominate the economy) to lend too much money. Thus debt in China keeps rising. It went from 254 percent of GDP (nearly three times what it was before 2008) in 2015 to 277 percent in 2016 and unless the government can develop some solutions it will be over 300 percent by the end of the decade.

What makes this pile of debt trap so toxic is that, much, if not most of this debt consists of loans that the borrower cannot repay, or not repay in a timely fashion. This is reflected in the rising (54 percent more in 2016) incidence of bankruptcy. The government would prefer to avoid the bankruptcy process because it is embarrassing, turns bad debt into losses and exposes details of how the bad debt mess works.

The growing bad debt problem, more than the South China Sea dispute, is what keeps Chinese leaders up at night. GDP growth is slowing, it was down to 6.7 percent in 2016 and the new American government is openly discussing economic retaliation against China. That is scarier than the American military because it can be more safely used by the Americans and the Chinese government refuses to discuss this vulnerability for obvious reasons. It is believed that nearly $600 billion worth of these loans are uncollectable. Chinese banks are trying to avoid writing off these bad loans (which hurts bank profits and puts some of them out of business). Many banks are repackaging the bad loans in an attempt to sell them off for far more than they are worth. Chinese banks call these new items WMPs (wealth management products) and assure buyers they are legitimate but offer these bond-like securities with much higher interest rates than other corporate or bank bonds.

There's more at the link.

China certainly faces huge problems in its relations with North Korea, and with other nations involved in that problem;  but if its economy hits a brick wall, all the others will pale into insignificance.  The question is, will China deal with its economic problems responsibly?  Or will it try to mobilize public opinion against an alleged external threat, such as the USA, to divert attention from them?  In the past, it's chosen the latter option too often for comfort.

Peter

3 comments:

Anonymous said...

Yeah if they start having a debt crisis the USN should have standing order to clear off and not poke the Panda, and everyone make calm & sympathetic noises.

Judy said...

Anon at 12:29 PM - I don't think the boys in Washington are that smart.

Peter - How many times have the boys in Washington pulled the stunt of trying to divert attention from one of their screw-ups(poor decisions)? Why would the Chinese (or any one else for that matter) be any different?

Theother Ryan said...

It also really messes with their internal stability. The implicit promise of economic prosperity in exchange for no freedom of speech or basic human rights worked OK when everyone's lives were getting better. Now that many rich and middle class reaches self actualization on Moslows old higherchy of needs and are seeing their rising economics at risk it could get interesting.