This Week's Focus: The Chinese Debt Bubble will explode?

This Week's Focus: The Chinese Debt Bubble will explode?


The response to the 2008 crisis

As a measure to overcome the financial crisis, China has expanded domestic credit from 150% of GDP in 2008 to over 260% in 2015. The latest data of China's GDP is 10,354.8 billion USD and corresponds to 2014. in 2015 GDP grew 6.8% annually and is expected to grow 6.4% in 2016.

With all these data, the estimated total gross debt in China is about USD 28.75 billion (USD Trillion).

Exhausting the model

According to The Economist, the expansionary credit policy was successful in the past, and allowed to grow by just over 1 percentage point of debt / GDP for every 1% growth in GDP added. Currently, however, it would require quadrupling the new debt to grow at the same rate. Rollovers account for almost 40% of new debt.

Much of the credit created has gone to the housing market, so the chances of generating a bubble in property prices that cause one, similar to what was experienced in Spain, credit crunch seems obvious.

Everything is at home... for now.

However, unlike the Spanish case, China is a net creditor to the outside, ie, the rest of the world owes you money. Spain owed money to the rest. Therefore, the pressure to reduce foreign debt does not exist, although in the case of real estate assets perdiesen value, the effect on the ability to pay the debt of some real estate companies with unpaid generate impact on the banking sector.

The argument that generates more comfort among optimistic about China is that the banking sector is in the hands of the government, which owns the majority stake in major banks. Government, which has traditionally shown ability and determination to solve the problems of a strong and direct, unlike what usually happens, for example in the European Union.

However, the banking sector "shadow", ie credit unregulated activity has grown strongly in the last 3 years so that the level of loans in relation to deposits could be higher than estimated by UBS in the graphic, and get close to 100%, mainly in medium-sized financial institutions, according to The Economist. A more restrictive policy could lead to a crisis of any of these entities, with knock-on effects throughout the banking system. In this case, the effects would not be, at least temporarily restricted only to China, but spill over other markets.

Margin for hope

Nevertheless, there is time to redirect things. And, although changing economic paradigm that has started China, reducing the burden on its economy of manufacturing in favor of services while maintaining a pace of enviable growth, not everything is a bed of roses, recent evidence of contraction credit is showing signs that the Government is sensitive to these risks.

The outflows of recent capital, with effects in the currency that both frighten the rest of the world for its deflationary effects in developed countries, could be another destabilizing factor if China wants flexibility too fast system of exchange rate Yuan. Therefore, the need to reduce the debt of public enterprises in China has to be a priority.