China’s debt grows, and growth slows

Chinese growth slowed again towards the end of 2013. The latest survey of manufacturing activity pointed to a broad slowdown in December. New orders and export orders declined. An index tracking services slid to its lowest level since August 2011.

Meanwhile, the National Audit Office reported that local government debt had jumped by 70% to 18trn yuan ($3 trn) in the past three years. Throw in central government debt and overall state debt is now worth around 55% of GDP.

What the commentators said

China’s recent pattern of “stop-and-go” growth deceleration continues, said Peking University’s Michael Pettis on Ft.com’s Beyond Brics blog. Sporadic efforts by regulators to temper credit growth have caused the economy to slow sharply, but then policymakers backed off to keep growth at socially acceptable levels, so “GDP and credit growth subsequently reignited, although at gradually declining paces”.

Expect more of the same as the government tries to let air out of the credit bubble without a hard landing.

But the worry is that its efforts won’t suffice. Overall credit in the economy continues to rise quickly. Liabilities at non-financial companies could climb to 150% of GDP in 2014, the highest among the world’s ten biggest economies, according to Haitong Securities. The US figure is 78%.

“The longer it takes to bring credit under control,” said Gavyn Davies on Ft.com, “the greater the chance of a much harder landing.”

The economy already appears to be hooked on debt, with four yuan of debt needed to produce one yuan of growth, compared to one a few years ago. That’s partly because companies increasingly seem to be borrowing just to roll over loans already on their books – they are borrowing to avoid recognising bad loans.

And given that the shadow banking system – off-balance-sheet lending at banks and other forms of underground credit – is partly responsible for the credit bubble, the spillover effects of any bankruptcies induced by a state credit clampdown could take the authorities by surprise.

The upshot, said Jeremy Warner in The Daily Telegraph, is that a major slowdown looks in the offing. “China is about to learn the hard way that there is a downside to the free market – by definition, it cannot be dictated to.”

Merryn

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