Morgan Stanley’s Chief China Economist says that Beijing has three “magic weapons” at its disposable for defusing any debt problems, which means that there is little likelihood of a financial shock or even debt crisis over the next several years.
Speaking to Walstreetcn.com, Robin Xing said that the first weapon in China’s enchanted arsenal is the fact that the chief source of funds for Chinese borrowing is domestic savings, as opposed to overseas credit, and the fact that investment is inwardly directed.
The second is that the Chines government’s debt-to asset ratio remains lower than that of many Western countries, because of government holdings of state-owned enterprise equity and land reserves, while the third is a modest decline in leverage levels in the manufacturing sector in tandem with gains in the government’s infrastructure-related debts, with the debt of overcapacity sectors such as steel, cement and electrolytic aluminium falling as a percentage of total debt.
Xing predicts that the pace of growth in Chinese debt will ease over upcoming years, and potentially peak by 2030.
“During the 20 years from 1998 to the present, fluctuations in China’s debt-to-GDP ratio have followed cyclical rules,” said Xing. “This means that when the outside environment improves, private sector production capacity investment revives, and the state-owned enterprise production capacity investment gap diminishes, we can control the pace at which debt increases.
“For this reason, the pace of increase in China’s debt-to-GDP ratio has eased over the past three years from 20% to 10%. By 2030, the ratio will be at around 340%, equal to the average level for OECD nations.
“This is not the same as the pessimistic scenario of a swelling to above 400% and the triggering of a debt crisis.”
Weak correlation between real estate and credit cycles
According to Xing China’s “credit impulse” – which is the change in new credit issued as a percent of GDP, display a positive correlation with the pace of growth in state-owned enterprise investment, yet little relationship with the pace of export growth, private sector investment growth or real estate investment growth.
“Historically Chinese real estate has been more dependent upon credit cycles, meaning that when credit is loose, real estate growth will accelerate,” said Xing. “However since 2015, the relationship between the two has weakened.”
Xing points out that tightening measures have lead to weakening in public investment as well as the real estate market, which has been partially compensated by robust external demand and revival in private investment, while the growth driver has shifted towards low-debt intensity manufacturing sectors.