Chinese authorities need to act soon to rein in the “debt mountain” currently putting their economy at risk or suffer more severe fallout from a market shock, cautions BNP Paribas.
The company said private-sector credit growth has “accelerated to a potential crisis point” in recent years, with data from the Bank for International Settlements (BIS) showing non-financial private sector debt grew to more than 160 per cent of GDP by 2015.
The Chinese government’s small foreign debt, large stake in the banking sector and capital controls give authorities the capacity to prevent a “debt explosion”, however BNP Paribas said risks remain and investors should not overlook the country’s debt problem.
“The risk of a debt-blow-up is low – the true risk is subtle. Gradualism as a debt clean-up strategy may make sense in the short-term,” the company said.
“The question is: in the longer-term, will Beijing bite the bullet to resolve the debt problem?”
The company said “kicking the can down the road” was an unsustainable strategy and as “gradualism only trades today’s growth through continued capital misallocation for tomorrow’s economic efficiency” and the country’s debt will begin to negatively impact growth.
BNP Paribas said bad debts would rise and banks would look to “siphon off a lot of capital” and avoid further private sector lending, which in turn would see the Chinese government provide fiscal spending to support demand, reducing investment efficiency, reducing returns on capital and causing private investment to decline further.
“The message is clear. The longer Beijing avoids dealing with the debt problem, the harder it will be to manage a shock as the potential fallout will become more serious over time,” the company said.
“Initial signs show that Beijng still deserves the benefit of the doubt, as the recent surge in bankruptcy cases indicates both economic stress and progress in its efforts on dealing with indebted zombie companies and excess capacity.”