We have been watching the build-up of debt in China for some time in line with our Debt Burden theme. Indeed, the pace and extent of the debt acceleration in China is behind our major concern for China’s growth outlook and our underweight position in the market. Current estimates of debt in China vary, but they are in the range of 250-280% of GDP. This is approaching levels seen in developed markets such as South Korea, the USA and Germany. With such a surge in credit one must question the quality of this lending, especially when much of it has essentially been dictated by the state rather than on a rigorous risk-adjusted basis. This stock of bad debt is the crux of the problem, and has the potential to derail growth in China. We are not convinced the banks’ reported non-performing loan figures reflect this reality, and we believe the market is too relaxed about the built up risks, assuming the central government can bail the system out. The other aspect of the huge growth in leverage in China is the extent of “shadow banking” i.e. non-formal lending. Some estimates suggest up to 30% of total debt is of this nature, which accentuates the systemic risks to the financial system in the event of a growth slowdown.
Caroline Keen, Newton – a BNY Mellon company