There’s Just No Stopping the Chinese Debt Juggernaut

In the financial world, several notable investors have recently expressed concern about China’s growing debt. Famous investor George Soros reported that the country’s situation bears an uncanny resemblance to the conditions that were present in the United States prior to the 2008 financial crisis. He said, “It’s similarly fueled by credit growth and an eventually unsustainable extension of credit.” Since China’s current debt involves almost every aspect of its economy from its banks to individual households, there’s just no stopping the Chinese debt juggernaut.

Is Chinese Debt too Intertwined to Unwind?

From the time of the international global crisis, many of the Chinese economy’s sectors have taken on significant amounts of debt. The country’s debt grew to 247 percent of its gross domestic product, or GDP, since 2015. In 2005, the nation’s debt was 160 percent of its GDP.

According to Bloomberg, China’s debt consists of four main components, which are bank, government, corporate and household. While the country’s bank debt has dropped somewhat in relation to the size of its economy in the last decade, China’s corporate debt has risen to 165 percent of its GDP. Its government debt increased to 22 percent of the GDP while its household debt rose to more than 40 percent of the GDP. This is an increase of 23 percentage points.

China’s Households are in More Debt

The Star Online reports that Chinese households are taking on more debt. However, the household debt numbers for the U.S. before the subprime crisis hit were much higher. In America, the household debt reached a peak of 100 percent of the country’s GDP. For China’s households, the savings are double their debt amount. When 2015 ended, households had deposited 55 trillion yuan, which is $8.4 trillion U.S. dollars. During this same period, the country’s household debt came to 27.4 trillion yuan.

The U.S. and China also differ when it comes to purchasing residential properties. In China, citizens usually buy their homes with a significant down payment. According to a survey completed by the China Household Finance organization, in 2012, the country’s average household debt in urban regions was just 11 percent of the nation’s home value, and mortgage debt was an uncommon occurrence. This means that it’s unlikely for a financial crisis to arise due to the country’s housing sector.

What Segment of China’s Economy is Putting the Country at Risk of a Financial Crisis?

If China’s immense debt load causes a financial crisis, it will most likely come from the country’s corporations and banks. In fact, the bond market is exhibiting signs of stress. Through June 30 of this year, the market experienced 17 defaults, which is triple the amount that it faced in 2015. Delayed payments also caused rising credit spreads along with cancellations of new issues.

In addition, across Chinese corporate sectors, leverage issues are not spread evenly. For instance, materials and energy companies are limited in their ability to service debt while healthcare organizations are more able to handle it. Telecommunication and information technology companies are also in better shape.

China’s Market is Different than Others

China’s market is different from the ones in other countries in a major way. Most large corporations along with all of the country’s major financial institutions are owned by the state. This means that the same entity owns creditors and debtors. It also allows the country to tackle debt problems in unique ways. For instance, the government can decide to cover the country’s massive debt, or it could take funds from its prosperous sectors and send it to the ones that are struggling.

The country has yet to take these steps, but shadow banking has grown by about 25 percent a year since 2009. These nontraditional financial institutions are peer-to-peer organizations that lend money to Chinese households and smaller enterprises. Since China has been inclined to use unusual methods to deal with its debt, the country has also faced more challenges when it comes to resolving its debt problems.

Can China Bring Down the Rest of the World?

If China goes down in a financial blaze of glory, could it take the global economy with it? Fortunately, for the world, this is unlikely because China’s savings rate is high. This funding situation makes it doubtful that China’s debt will bring about an economic Armageddon anytime soon. To read more about China’s debt juggernaut, visit the Personal Money Store.

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