Meanwhile high debt levels within China’s economy have long been a concern for observers.
SCMP, June 1
The trouble with these observers of high levels of debt within China’s economy is that they don’t always agree with each other about just how high this level of debt is.
Here, then, is my take on this question. I look at aggregate financing from the monthly monetary survey conducted by the People’s Bank of China and from this I deduct non-financial enterprise equity financing. Equity is not debt and what we are looking at is debt.
This leaves us with local and foreign currency loans, trust loans, bankers’ acceptances and net corporate bond financing, the total of which comes to 158 trillion yuan (HK$ 181 trillion) or the equivalent of 207 per cent of gross domestic product, which is almost double of what this ratio was eight years ago, and is indeed generally considered to be on the high side.
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I do not declare myself absolutely satisfied with these figures. I think the equity element I subtracted of 6.1 trillion yuan appears low when the market capitalisation of equities on the Shanghai market alone is 30 trillion yuan, although this may tell you no more than that the Shanghai market is overvalued.
I also am not satisfied that these official figures capture the amount of debt in the reportedly active shadow market.
How much does this come to? Good question. You tell me and we’ll both know although I imagine it is at least in two digits of trillions of yuan.
But in context, China has international company. We shall leave the Greek stratosphere out of this but it is worth nothing that in Japan central government debt alone comes to more than 200 per cent of GDP and in the United States more than 100 per cent (China 16 per cent) while consumer and mortgage debt adds another 100 per cent to the US total.
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Most of all, however, I think this could be looking at things the wrong way. China’s net debt is effectively zero for the simple reason that it is almost all internally held and that for every yuan of debt there is a yuan of credit. On this measure the US is much more indebted. Its debt is substantially held abroad.
Also to the point, there are effectively only two avenues of finance, debt and equity, and, when interest rates are low, debt is the responsible choice. Why sell away your patrimony when borrowings are easily negotiated at low rates? What really matters is how the money is invested, rather than how the liabilities side of the balance sheet is divided up between equity and debt.
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But I have a caveat to make to this statement. When government or its agencies tell banks to whom they must lend or artificially depress the cost of debt they encourage bad lending and generally also a false stimulus of financial markets. I think it is becoming increasingly clear that this has happened in both the US and China in recent years and that this is where the real question of debt now lies.
If so, it is pointless to expect regulators to fix things, as politicians in both countries now think they can do. The only real cure for misallocation of capital is recession, a painful cure but no other has yet been found.
Let’s have it straight, however, that the cause of the problem was not too much debt but how that debt was invested.