China's Debt at Risk?

TUESDAY, MARCH 12, 2013

China’s Exploding Debt

By C.P. Chandrasekhar, Professor of Economics, School of Social Sciences, Jawaharlal Nehru University, New Delhi, India. Cross posted from Triple Crisis

If the international media are to be believed the world, still struggling with recession, is faced with a potential new threat emanating from China. Underlying that threat is a rapid rise in credit provided by a “shadow banking” sector to developers in an increasingly fragile property market. Efforts to address the property bubble or reduce fragility in the financial system can slow China’s growth substantially, aggravating global difficulties.

The difficulty here is that the evidence is patchy and not always reliable. According to one estimate, since the post-crisis stimulus of 2008, total public and private debt in China has risen to more than 200 per cent of GDP. Figures collated by the World Bank show that credit to the private sector rose from 104 per cent of GDP in 2008 to 130 per cent in 2010, before declining marginally in 2011. The evidence suggests that 2012 has seen a further sharp increase.

The problem is not merely the rapid rise in credit as a means to spurring investment and growth. More significant is the rapid growth of lending by the “shadow banking” system, at the forefront of which are off-balance sheet vehicles of banks to which deposits mobilised by offering relatively higher interest rates, through means such as wealth management products (WMPs), are diverted. Such loans are then provided to borrowers such as real estate developers to whom lending by the banks is being restricted. As of now WMPs are placed at around 10 per cent of total deposits in Chinese banks, but the rate of growth of this relatively new phenomenon is high. Further, banks are diverting these resources even to securities brokerages for management. Overall, central bank figures indicate that conventional bank loans have fallen from 95 per cent of total financing in 2002 to as low as 58 per cent in 2012.

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