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back to index backCHINAtalk April,  2017


Opinion: China's economic problems will come to a head in 2017

Faced with a heavy debt load, the Asian nation would find it difficult to absorb an external shock such as a U.S. trade war.

Next year is shaping up to be a decisive one for China's economy.

In the eight years since the global financial crisis struck, the vitality and importance of low-cost exports " the kind the Chinese economy used to rely on " have steadily declined. Scrambling to prop up the country's growth and protect its near-universal employment, China's leaders have embraced monetary and fiscal stimulus measures, causing the country's outstanding debt to balloon to almost 250% of gross domestic product.

Corporate debt, by far the largest share of China's total debt, has likewise surged by more than 60% to top 165% of GDP. Now, a nationwide debt crisis looms at Beijing's doorstep amid business defaults and bankruptcies, low industrial profits, winnowing returns on investment and the very real prospect of yet another slowdown in the real estate sector. How well Beijing manages these problems in the months ahead will, to a great extent, determine China's economic, social and political stability for years to come.

A deepening debt crisis

China's economy has always depended heavily on investment into fixed assets such as roads, railways and apartment complexes. But over the past decade, as cheap exports' share of the economy has collapsed and as household consumption has continued to slide, this investment has become one of the primary drivers of economic growth and employment in China " and, by extension, a cornerstone of its stability.

That much of China's fixed asset investment comes from the country's biggest state-owned banks (including the "Big Four," which answer directly to Beijing) not only highlights its importance as a policy tool but also explains why Chinese leaders have wielded it so liberally to offset weaknesses in other areas of the economy.

Of course, the funds for such ample investment have to come from somewhere, and over the years Beijing has gotten them through many different means. From slashing benchmark interest rates and bank reserve requirements to boosting domestic equity markets and direct spending, the Chinese government has paid for its purchases in several ways.

The vast majority of Beijing's investment, however, has been financed by debt, whether in the form of loans, bonds or other types of formal and informal lending. Most has come from state-owned banks: In 2015, outstanding bank loans equaled 141% of GDP, while outstanding bonds totaled 63% of GDP. Whereas countries such as the United States and Japan tend to spur growth by stimulating equities or hiking government spending, China has used its control over the banking sector to shape the cost of capital and determine where and how fast it flows.

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Source: MarketWatch - GAI



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