China’s High Corporate Debt Signals Imminent Crisis

By Gao Zitan
Gao Zitan
Gao Zitan
April 12, 2013 Updated: April 13, 2013

China’s unsustainable corporate debt to GDP ratio is the highest in the world, and experts conclude that all three signs portending financial crisis have already appeared.

China has the largest credit bubble in the world, in the form of corporate held bonds and short term loans, analysts say. Beijing-based magazine Caijing reports that China’s corporate debt to GDP ratio reached 151 percent, citing research by Zero Hedge analysts

This figure is doubted by some, but other analysts present a similar conclusion. China’s total corporate debt amounted to 108 percent of the GDP in 2011, rising to 122 percent of the GDP in 2012, a 15-year high, says GK Dragonomics in a November 2012 economic analysis published in Bloomberg Business Week, titled “Corporate China’s Black Hole of Debt.”Even research by Chinese experts reaches comparable conclusions. Studies by Liu Yuhui, finance expert at the Chinese Academy of Social Sciences, indicate that non-financial sectors in the Chinese economy, which include government, enterprise and residential sectors, account for 114.8 trillion yuan ($18.54 trillion) in debt. This is equivalent to 221 percent of 2012’s GDP of 51 trillion yuan ($8.38 trillion), according to an April 8 report by First Financial Daily.

Some experts believe that “non-financial sector debt ratio” is a better indicator of excessive debt expansion in China. After subtracting 18 trillion yuan ($2.91 trillion) of residential sector debt (34.7 percent of GDP), and about 68 trillion yuan ($5.33 trillion) of public sector debt (from 59.4 to 65.12 percent of GDP), the remaining 68 trillion yuan ($10.98 trillion) in debt at the end of 2012 can be assigned to corporate, non-financial sectors. This accounts for 125 percent of the GDP, in line with the figures indicated by Zero Hedge’s and GK Dragonomics’s studies.

Whether the real ratio is 151 or 122 percent, economists are in agreement that such a high percentage is unsustainable. Corporate debt in China as a percentage of GDP has far exceeded the acceptable amount in any advanced economic system, which is about 50 to 70 percent. From an economic perspective, this high leverage ratio has resulted in serious economic problems.

However worrisome, these data do not tell the whole story. According to an April 9 report by China Times, financial expert Liu Yuhui said the profitability of Chinese industrial enterprises (net profit in total revenue) is only about 5 to 6 percent, half the global average, while the average corporate debt in China is about 3 to 4 times of the global standard.  

“Companies have seen their business slowing down and revenues were not what they had expected. They have bridged the gap by taking on more debt,” says GK Dragonomics Research Director Andrew Batson, according to Bloomberg. 

Three Signs of Crisis 

High leverage ratio is one of the well-tested signs of economic crisis. Zhang Zhiwei, chief China economist at Nomura Holdings, listed the three indicators of economic crisis–high leverage ratio, rapid increase in assets, and decreased potential of economic growth–in his report, “China: Risks of Economic Crisis Increasing.” Unfortunately, China is experiencing all three.

In order to hide these signs, the Chinese regime has been expanding the credit market to stimulate the economy. 

As a result the amount money in circulation (M2 money) increased from 16 trillion yuan ($2.58 trillion) in 2002 to 100 trillion yuan ($16.15 trillion) in 2013. In a little more than a decade, the currency supply in China has increased five-fold. Excessive printing of currency is considered the root cause of inflation. 

Additionally, relying on exports and unregulated investments (such as real estate development) to propel economic growth has resulted in a twisted economic structure. Wen Jiabao, the former premier, famously said that China’s growth is “unbalanced, uncoordinated, and unsustainable.” 

Local Government Debt

Former Minister of Finance Xiang Huaicheng said during high-level economic leadership talks at the 2013 Boao Forum that local government debt had reached 20 trillion yuan ($3.23 trillion), according to an April 7 report by China News.

Even though Xiang did not admit it, another Chinese economist, Hu Zuliu, pointed out during the Boao Forum that China will be the place where the global debt crisis begins 21st Century Business Herald reported the same day. 

Economist Larry Lang believes that the financial crisis and the banking crisis have already begun in China. In August 2012, Lang listed eight major crisis situations that were waiting to explode. These crises include excessive resource use, excess production capacity, debt crisis, inflation, and the banking crisis. 

Translation by Frank and Sophia Fang. Written in English by Carol Wickenkamp

Read the original Chinese article.

Gao Zitan
Gao Zitan