Emerging Markets Report: China’s debt problem is bigger than you think
China’s bad loans are many times worse than what the official data are claiming, and the Chinese authorities do not have a strategy to tackle the problem, according to the latest research from CLSA.
“Nonperforming loans will worsen with the slowing economy, but the government does not have a comprehensive plan,” Francis Cheung, head of CLSA’s China and Hong Kong strategy, said during a presentation Friday.
Cheung estimated that the country’s bad loans are actually around 15% to 19%, significantly more than the 1.6% announced by the government recently. At that rate, it will require at least $ 1 trillion, equivalent to 10% of the economy, to clean up the banking sector, he said.
That is in line with a study from the International Monetary Fund last month that indicated that loans at risk account for about 15.5% of total bank loans, or $ 1.3 trillion.
“The share of commercial banks’ loans to corporates that could potentially be at risk has been rising fast and, although currently at a manageable level, needs to be addressed with urgency in order to avoid serious problems down the road,” the IMF said in the study.
But Beijing’s hands are tied in part because of its focus on supporting the economy via stimulus measures, with restructuring taking a back seat for now.
China’s gross domestic product grew 6.7% year-over-year in the first quarter, the slowest since the financial crisis in 2009. However, its all-out effort to prevent a sharp downturn in the economy is having mixed results.
China’s manufacturing purchasing managers index, a gauge of factory activity, slid to 50.1 in April from 50.2 in March, the National Bureau of Statistics said last week.
“Stimulus is becoming less effective, requiring four units of credit for each unit of growth,” said Cheung, who projected China’s debt-to-GDP ratio will hit 300% by 2020. Economists estimate China’s debt-to-GDP ratio at 200% to 250% as of 2014.
The analyst believes the recent spate of bond defaults is a prime example that nonperforming loans are rising more rapidly than expected.
Chinese companies defaulting on their bonds have surged to 22 so far this year, already matching the total for all of 2015, The Wall Street Journal reported. Many of them are by state-run corporations, suggesting that Beijing may not be so willing to prop up money-losing enterprises at all cost.
Cheung also estimated that bad loans in the shadow banking sector, used by financial institutions to circumvent regulations, at about $ 700 billion.
The CLSA presentation echoes what hedge-fund managers like Kyle Bass of Hayman Capital Management have been saying the past few months about the alarming rise in China’s bad debt.
Bass, who shorted the yuan on expectations that China’s economic woes will worsen when its “excesses come home to roost,” believes Chinese banks are not sufficiently capitalized.
Jim Chanos, founder of Kynikos Associates, has also warned over the years that China is hurtling toward its economic doom as it continues to feed its economy with borrowed money.
“New debt [is] increasingly paying off old debt and financing losses,” Chanos noted in a slideshow on China at an investment conference last year.