Has China Been Unfairly Penalised by Ratings Agencies for High Leverage?


Global policy analyst Dan Steinbock says that the ratings agencies are meting out unfair treatment to China for its current debt levels, while mistakenly assuming that advanced economies enjoy greater stability

The surge in China’s debt levels over the past decade has triggered concern amongst observers both at home and abroad, prompting Beijing to launch a heavy handed deleveraging campaign.

Both Moody’s Investors Services and Standard & Poor’s downgraded China’s sovereign credit rating earlier this year, due to the risks created by its immense debt pile.

There’s no question that China’s leverage has surged since the Global Financial Crisis, with the debt-to-GDP rising from 132% in 2008 to 258% as of the end of the first quarter.

This increase was primarily driven by two successive waves – a 4 trillion yuan stimulus package in 2009 in the immediate wake of the GFC, and a massive credit expansion in 2016, which saw Chinese banks extend an unprecedented 12.65 trillion yuan in loans.

Despite this leap in Chinese leverage, Dan Steinbock, founder of the Difference Group and formerly a visiting fellow at the Shanghai Institute for International Studies, says that the ratings agencies may have treated China too harshly when its debt levels are compared to other major economies.

Writing for the South China Morning Post Steinbock points out that China’s current debt-GDP ratio of 258% is still below that of advanced economies, whose average stands at 268%.

The Canada, UK and France all have debt-GDP ratios which are significantly higher than China’s, at 296%, 299% and 280% respectively, yet also still all enjoy better credit ratings.

Japan provides an even more striking example, given that its current debt-GDP ratio stands at a staggering 373%, yet its sovereign credit rating remain on par with China’s.

The ratings agencies could be granting long-established developed economies more favourable treatment on the grounds that they’re richer and perceived as more stable.

In Steinbock’s opinion, however, this assumption is mistaken, given that China still enjoys a growth advantage as an emerging economy playing catch-up, while developed nations are already straining at the bounds of productivity.

In China’s case the debt is a “cyclical side-effect,” while for advanced economies it could be a “secular burden.”

“In advanced economies, total debt has accrued in the past half a century, decades after industrialisation,” writes Steinbock.

“In these countries the accrued debt is the result of high living standards that are no longer sustained by adequate growth and productivity…leverage allows them to enjoy living standards they can no longer afford.

“The context of leverage is very different in China, where excessive debt was accrued only in the past five years, not in the past 50 years as in most advanced economies.

“Unlike the latter, different regions in China are at different stages of industrialisation…intensive urbanisation will continue for another decade or two, which ensures solid growth prospects.”