One of the West’s leading experts on Chinese finance says Beijing has grossly underestimated upcoming growth in the country’s debt levels.
Forming Fitch Ratings analyst Charlene Chu sees China’s total outstanding debt rising to 223 trillion yuan (USD$33 trillion) by December, for a 13% gain compared to 196.8 trillion yuan at the end of last year.
Her estimates are far higher than the Chinese government’s official figure of 167 trillion yuan in outstanding credit for June, with Chu says fails to take into account items including bond issuance by local governments as well as off-balance sheet financing.
“The overarching issue for China is that there’s a ton of credit that’s not in bank loan portfolios” said Chu to Bloomberg.
In Chu’s opinion, failure to fully account for non-bank forms credit means that the Chinese government’s official non-performing loan estimate of 1.74% is extremely wide of the mark.
Her analysis would point to potential credit losses of at least 38 million yuan, for a non-performing credit ratio of 25%, which is higher than the level of Malaysia during the Asian financial crisis and Portugal during the European debt crisis.
If these losses are ever fully realised, they would require a rescue package of around 21 trillion yuan.
While Chu does not believe that China’s much vaunted deleveraging campaign is doing much to reduce total debt levels, she does acknowledge that it has led to a slowing in debt growth from 19% last year to 13% in 2017, and that Beijing’s crackdown on shadow banking is also having positive effects.
“The worst-case scenario is that they allow the rate of credit growth that we’ve seen over the last 18 months continue and back off on this crackdown that they’ve undertaken with WMP’s,” said Chu. “That is a recipe for something to go wrong.”
Chu’s latest analysis just following Moody’s decision to upgrade its outlook for China’s banking system to stable from negative, on the grounds that non-performing loans have likely stabilised.