CHINA´S BALANCING ACT ON DEBT IS BECOMING TRICKIER / THE FINANCIAL TIMES

China’s balancing act on debt is becoming trickier

The government must hold its nerve, even as economic growth slows


China's president, Xi Jinping, delivers a speech in Beijing: non-financial sector debt in the country has gone from $6tn in 2007 to nearly $29tn today © EPA


Why continue working when you are guaranteed a monthly income?” So asks Xu Yongan, a 55-year-old former steelworker from Anhui province and the recipient of an employee buyout. It may seem a bit puzzling that in China, the factory to the world, factory workers are paid to stay home. The solution to the puzzle — as to most puzzles about the Chinese economy — comes down to debt.

The government worries that years of investment-led growth have left the country with a heavy debt burden and lots of excess industrial capacity. It was a government-led effort to shut inefficient factories that led to Mr Xu’s early retirement.

That Chinese debt has grown to dangerous levels is beyond dispute. Non-financial sector debt has gone from $6tn in 2007 to nearly $29tn today, according to data from the Bank of International Settlements. The debt, equivalent to 260 per cent of gross domestic product, has brought with it dramatic declines in credit efficiency. The International Monetary Fund points out that in 2016 it took four units of credit to raise GDP by one unit. A decade ago the ratio was 1.3 to one.

China’s debt-to-GDP ratio is not far from that of the US, for example. But, as Zhou Xiaochuan, the central bank governor, emphasised last month, China’s companies bear an extraordinary high portion of the burden. Corporate debt levels at 160 per cent of GDP make it the most leveraged corporate sector in the world.

A year ago the situation looked even less tenable than it does today. Since then, the efforts to rein in excess capacity seem to have had some effect. Commodity prices have firmed, helping the big state-supported industrial companies. Private company growth (particularly in technology, as exemplified by groups such as Alibaba and Tencent) have helped reduce overall leverage levels. If China is to grow its way out of its debt problems, these trends must continue. Another potentially helpful factor is rural growth: over the past decade, China has promoted the transfer of agricultural land usage rights among farmers, resulting in bigger farms, increased investment and higher returns. Data on the scale of such transfers is scarce but an online broker, tuliu.com, has transferred a cumulative 6.8m hectares since it started up in 2009.

It reassures many China bulls that, due to its current account surplus and accompanying high savings rate, China has lent effectively all of the money to itself. But all the same, if the debtors cannot service their debts, a painful restructuring will be necessary. To avoid a crisis the government will have to tread carefully. The tentative withdrawal of credit from the economy is making the bond market jumpy. The central bank yesterday added more reserves into the financial system than it has in almost a year, to stem weakness in government bond prices. But liquidity injections are not a long-term solution to a debt problem. Neither is moving debt around by, for example, issuing asset-backed securities, which are increasingly popular in China.

So the government must continue to move deliberately and hope the centre holds. It will need to stay disciplined about keeping a lid on loan growth, industrial capacity and — most importantly — the shadow banking system of dodgy fund companies, trusts, and wealth management products. Slow and steady progress these front, even if the economy does not grow as quickly as previously, will send a reassuring message to global investors, and minimise the chances that China’s debt addiction will require a more radical form of treatment.