The Times: “Fund managers who between them control more than $1 trillion in assets were warned yesterday that China was in the grip of a debt addiction that could destabilise its financial system.
Speaking at the annual CLSA China Forum in Beijing, Francis Cheung, the brokerage’s China head, said that the country was hooked on an “unsustainable” pace of growth requiring ever-greater injections of debt to keep going.
Fifty per cent of the Chinese econ-omy is made up of investment, an unprecedented level for a country at its stage of development, sucking in increasing amounts of credit, effectively to buy growth.
Total debt in the world’s second-largest economy soared from 148 per cent of gross domestic product in 2008 to 205 per cent of GDP last year and is expected to hit 245 per cent by 2015, Mr Cheung said in a report.
But despite the rising tide of investment being poured in to build everything from houses and roads to railways and power plants, China’s credit habit is becoming less effective, with the same amount of debt generating lower returns every year.
China’s annual GDP growth has almost halved from 13 per cent in 2007 to an expected 7.5 per cent this year, while total debt has more than doubled in the same time, a development model that President Xi Jinping also has called “unsustainable”.
“China is running just to stand still … China is not a rich country; it is a lot of debt for a country at this GDP level. What I worry about is unregulated lending,” Mr Cheung told the forum.
With Chinese industry suffering from overcapacity in every sector from steel to cement to solar panels, the country “cannot use any more stimulus policies to boost growth”.
The fastest-growing debt is that shouldered by local governments, with the undisclosed sum estimated to have hit 20 trillion yuan (£2 trillion) last year — a doubling in two years. Local governments are being forced to pay more to service their debts, while their ability to raise money through selling land is slowing.
The biggest risk, Mr Cheung said, came from the growing use of unregulated loans generated by “trust companies”, financial sector intermediaries that make money from offering risky loans known as “wealth management products” to private companies unable to get credit from state-run banks.
A report published by Moody’s yesterday found that China’s “shadow banking” sector had hit an estimated 29 trillion yuan (£3 trillion) last year, posing a “systemic risk” to the financial system, despite a partial clampdown in March. The credit ratings agency also warned of the threat of contagion, stemming from little-regulated shadow lending that has swollen by 67 per cent in the past two years.
Last month China sudffered its first sovereign credit rating downgrade in 14 years as Fitch lowered its appraisal amid fears that its debt problems would necessitate a government bailout.”
via An addiction that could spell economic disaster | The Times.
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