Tue, Jul 26, 2016 - Page 10 News List

PRC heading for debt crisis: analysts

Reuters, BEIJING

As China’s economy notches up another quarter of steady growth, the pace of credit creation grows ever more frantic for every extra unit of production, as inefficient state firms swallow an increasing share of lending.

The world’s second-largest economy grew 6.7 percent in the first half of the year, unchanged from the first quarter, testament to policymakers’ determination to regulate the pace of the slowdown after 25 years of breakneck expansion.

Analysts say that determination has come at the cost of a dangerous rise in debt, which is six times less effective at generating growth than a few years ago.

“The amount of debt that China has taken in the last five, seven years is unprecedented,” Morgan Stanley head of emerging markets Ruchir Sharma said at a book launch in Singapore. “No developing country in history has taken on as much debt as China has taken on a marginal basis.”

While Beijing can take comfort that loose money and more deficit spending are averting a more painful slowdown, the rapidly diminishing returns from such stimulus policies, coupled with rising defaults and non-performing loans, are creating what Sharma calls “fertile [ground] for some accident to happen.”

Total bond debt in China is up more than 50 percent in the past 18 months to 57 trillion yuan (US$8.5 trillion), equal to about 80 percent of GDP, and new total social financing, the widest measure of credit provided by the Chinese central bank, rose 10.9 percent in the first half of this year to 9.75 trillion yuan.

China’s money supply has increased in tandem with new lending and at 149 trillion yuan is now 73 percent higher than in the US, an economy about 60 percent larger.

“China is the largest money printer in the world — they have been for some time. The balance is really extreme,” Crescat Capital LLC chief executive Kevin Smith said.

The reason China gets such poor returns from this pump-priming is that state firms are the main beneficiaries of extra credit, at the expense of the more efficient private sector.

Some of the slowdown in private sector growth is weak confidence in the business outlook, but a lack of access to affordable financing is also a factor, the government and economists say, as banks prefer the security of state-owned borrowers.

Though Beijing officially wants to rebalance the economy to the private sector and cut surplus capacity in heavy industry, that aspiration clashes with its more immediate ambition to hit its growth targets.

For now it seems the latter goal is overriding the former.

“We believe that China’s short-termism will only add to its long-standing problems of excess capacity and non-performing loans,” Fathom Consulting analyst Laura Eaton wrote in a note following the release of first-half GDP data.

Smith thinks it will lead to a twin currency and banking crisis, with a 20 percent crash in the yuan versus the US dollar.

“It’s a question of when and it looks like it’s coming pretty close,” Smith said.

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