Stop Worrying About Chinese Debt? (The Asset)
In the wake of a a spate of recent commentary warning about the rise in China’s debt (which jumped from 148% of GDP in 2007 to 249% at the end of the third quarter of 2015), Andrew Sheng and Xiao Geng have written a commentary piece in The Asset about why people need to stop worrying and what China should do to address or re-balance the situation.
They first noted:
For starters, China has a very high saving rate – above 45% over the last decade, much higher than in the advanced economies – which enables it to sustain higher debt levels. Moreover, China’s banking system remains the primary channel for the deployment of the household sector’s savings, meaning that those savings fund corporate investment through bank lending, rather than equity financing (which accounts for only about 5% of net investment).
Once these factors are taken into account, China’s overall debt levels do not seem abnormally high. While debt might be a problem for Chinese companies with excess capacity and low productivity, companies in fast-growing, productive sectors and regions may not be in too much trouble… Thanks to China’s high saving rate, the country’s banking system had a loan-to-deposit ratio of 74% at the end of 2015, with 17.5% in required reserves held at the central bank… Furthermore, after more than three decades of rapid income growth, China has accumulated wealth (or net assets) in almost all sectors. By any standard, China’s household sector has very low leverage, with a debt-to-deposit ratio of 47.6%.
Their ultimate point though was that China does need to address its domestic debt overhang and the use of more equity is one option the Chinese have as the sooner they rebalance from debt to equity, the better off the country will be.
- Chart: Chinese Margin Debt vs Other Stock Market Crashes (Guggenheim)
- Five Misconceptions About China’s Stock Markets (KraneShares)
- China Still Leads the BRICs in the Global Competitiveness Report
- The 40 Biggest Chinese Stocks Being Added to the MSCI Index (Fortune)
- China’s Mutual Funds Industry Now the Second Biggest in Asia (The Asset)
- Chinese Tech Stocks Down But Not Out As Sentiment Shifts (FA)
- China’s Investment Managers Abandon the Retail Market to Focus on Wealth Management Market (FT)
- M&G Investments’ Vaight: “Chinese Firms Can Become Globally Competitive” (FE Trustnet)
- Fidelity China Special Sits Trust: Four China Investment Themes (FE Trustnet)
- Credit Trends: Demystifying China’s Domestic Debt Market (S&P Global Ratings)