Tue, Sep 13, 2016 - Page 9 News List

China’s big debt worries George Soros — should it worry you?

Beijing has long defied predictions that the Chinese economy is heading for a crash, but policymakers must limit the increase in debt without inflicting a severe blow to growth — a delicate balancing act

By Michael Schuman  /  NY Times News Service, BEIJING

Illustration: Yusha

The global economy is full of risks right now. Growth is sluggish and central banks seem powerless to fix it. Europe faces persistent challenges and division. In the US, the presidential election looms.

However, some say the biggest danger of all might be on the other side of the world, in China.

China is in the midst of one of the biggest borrowing binges in recent history. Its debt load reached US$26.6 trillion last year — about five times what it was a decade ago and more than two-and-a-half times the size of the nation’s entire economy. That huge increase has prompted some economists and even prominent investor George Soros to compare China to the US before the 2008 financial crisis.

How big a danger does China’s fast-growing debt load present to the nation or the world?

The traditional view is that rapidly rising debt eventually leads to an economic crisis. That can happen in several ways. In Greece, the culprit was the government, which built up more debt than it could handle. In the US, the risks lurked in the finances of banks and households.

In the case of China, the problem is primarily in the corporate sector. China’s big companies — especially those owned by the state — have done much of the borrowing. Higher debt means companies will have to spend more on interest and paying it back, and less on investing and hiring.

That is where a vicious cycle could come in. Less spending on investing and hiring hurts the overall economy, hitting corporate bottom lines and making it even harder for companies to pay off debt. Bad loans rise, banks freeze lending, confidence in the financial system can be shaken, leading to a full-fledged banking crisis.

China, which has the world’s second-largest economy after the US, plays a crucial role in generating global growth. Such a situation in China could ripple across the world.

On the other hand, a number of economists say China’s mountain of debt is not as scary as it appears.

HSBC chief economist for Greater China Qu Hongbin (屈宏斌) and his team argue that China’s debt is simply a result of the way its financial system works. For a variety of reasons, China’s corporations and households stash more money away than their peers in other nations. That cash piles up in banks and is turned into loans, resulting in China’s high level of debt.

Since the debt is backed by all that savings, it is not as risky, Qu says.

“Concerns about China’s debt levels reaching a critical threshold and posing a systemic risk are overblown,” the HSBC team wrote in April.

Others argue that China’s debt is less of a threat because it is to a great degree backed by the government. Much of it comes from state-run banks, which are the primary lenders to China’s large state-run companies. That means Beijing can stop banks from pushing borrowers too hard and would be more inclined to shore up the financial system, preventing the crisis that a more free-market economy might suffer.

The debt, too, is largely domestic, making China less likely to be pushed into a crisis by problems outside its borders, which have toppled debt-heavy emerging economies in the past.

Other economies, furthermore, have debt similar to or even bigger than China’s. Debt in the US, for instance, is about equivalent when compared with the size of the US economy. Japan’s is much larger, at about four times the size of its national output.

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