Growth in Chinese Debt Is Unsustainable: S&P Economist


Standard & Poor’s chief Asia Pacific economist says that China’s current levels of debt expansion are too high, and need to be dialled down if Beijing hopes to achieve sustainable growth.

Speaking to Australian ABC Radio’s The World Today, Paul Gruenwald expressed concern about China’s mid-term economic prospects due to excessive credit growth.

“For us growth is too high, credit growth has been too high, so our preference is to see the economy put on a more sustainable path.”

According to Gruenwald most of China’s remains concentrated in the corporate sector, which means that any efforts to deleverage the economy will need to involve reform of state-owned enterprises that make them more efficient and less credit-intensive.

The household sector is less of a concern in Gruenwald’s opinion, given the multi-decade absence of robust credit expansion this area, which has contributed to the Chinese economy’s structural imbalance and left consumption lagging.

“The balances sheets in the household sector are still pretty strong, we’ve got a rising middle class,” said Gruenwald. “As long as there’s a reasonably moderate debt expansion we’re less worried about the household sector than the corporate sector.”

Gruenwald’s remarks come just as a recent analysis by Reuters claims that China’s deleveraging campaign has failed to contain debt growth in the corporate sector.

The analysis of 2,146 listed Chinese companies concluded that their total debt at the end of September posted a year-on-year increase of 23%, for the most rapid rate of growth since 2013.

In order to achieve more sustainable growth, Gruenwald advocates dialling down nominal credit growth to around 8% a year, as well as bringing down GDP growth to between 5% and 5.5%.

Despite his concerns about China’s debt levels, Gruenwald does not foresee a hard landing for the economy given modest levels of external financing and Beijing’s penchant for heavy-handed intervention.

“A hard lending would come from a catastrophic loss of confidence,” he said. “We’ve got very little foreign financing, so it would be domestically led.

“People are still getting goods wages and putting money back into the system… so something really dramatic would be needed to create a so-called hard landing, to take growth to maybe three-ish, two-ish percent.”

Gruenwald further points out that China has not hesitated to employ “the heavy hand of the government” to achieve its goals with respect to economic deleveraging.

“It wouldn’t be a free-fall market led adjustment,” he said. “They clamped down on capital outflows last year, and they’ve been guiding the property markets.

“The Chinese have a very strong preference for stability, [and]  they’re going to guide credit growth lower. We’ll see how much appetite they have to actually let GDP growth slow – that’s for me a big thing to watch in the next year or two.

“But I think everything would have a relatively firm government hand, and they’ll try to control it as much as possible.”

A key example of China’s penchant for heavy-handed economic control is the property sector, which Gruenwald believes Beijing views as a “macro stabilisation instrument.”

According to Gruenwald if the Chinese economy slows down Beijing will relax the current round of strict property control policies in order to spur greater housing growth.