In a research briefing titled China’s rapidly rising debt – how will this evolve?, Oxford Economics’ head of Asia, Louis Kuijs, said China’s debt has increased at a worryingly rapid pace since 2008.
“We estimate debt reached 250 per cent of GDP at end-2015 (when bank loans were 142 per cent of GDP),” Mr Kuijs said.
“That is lower than the average of advanced countries of 258 per cent of GDP but substantially higher than the emerging market average of 175 per cent of GDP,” he said.
The most concerning thing about the rapid rise in Chinese debt is how much of it has accumulated in problematic, unproductive sectors, Mr Kuijs said.
With a structural overcapacity in key industrial sectors and high inventories of unsold housing, the quality and productivity of capital in China has Oxford Economics concerned.
China’s debt levels have increasing numbers of observers predicting that the country may succumb to a financial crisis in the near future, Mr Kuijs said.
“But financial crises are not triggered by bad loan problems. They tend to happen when, because of a sudden shock, sentiment worsens and liquidity in the financial system dries up. As banks respond by lending less, powerful circular effects occur,” he said.
However, a liquidity squeeze or ‘Minsky moment’ remains quite unlikely in China, Mr Kuijs said.
“Could China end up in the situation that Japan was in during the 1990s, with bad loans and a slowly deflating asset bubble weighing on the economy?” he asked.
China’s current debt position looks eerily similar to that of Japan in the 1990s, Mr Kuijs said.
“One key difference is that Japan in 1990 had largely finished catching up in terms of development, whereas China now, with a GDP per capita of around 15 per cent of that in the US in 2015, still has a lot of catch up to go through,” he said.
“We expect GDP growth to be 5.5 to 6 per cent in the coming decade. This will make it easier for China to absorb bad loans, monetary overhang and inflated asset prices. Indeed, it is probably more appropriate to compare China now with Japan in the 1960s.
“Thus, China still has time to avoid the truly problematic scenarios. But that does not take away the fact that current trends are not sustainable,” Mr Kuijs said.
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