China: Debt problem continues – Commerzbank

Analysts at Commerzbank point out that China is sitting on a huge pile of debt which threatens to become an unsolvable problem.

Key Quotes

“China’s authorities have recognized the risk but are still missing a convincing and efficient approach to tackle the issue. With the help of, among other things, stricter regulation of the shadow banking sector, a reduction in explicit and implicit state guarantees and a gradual increase in financing costs, the Chinese authorities succeeded in stabilizing the debt level in 2016 and 2017.”

“The deleveraging campaign was to be continued in 2018 but instead the trade dispute with the U.S. provided a strong headwind for growth as a result of which China’s rulers have apparently fallen back into old patterns to support the economy: At the beginning of the year, the debt level increased again sharply. Debt of the government, households and companies outside the financial sector now amounts to more than 260% of GDP. This makes China the leader among the emerging markets.”

“And in our opinion, the resurgence of debt is likely to continue as the PBoC has shifted to a more accommodative monetary policy stance since Q2 2018 largely due to the economic slowdown and trade tensions. As China’s corporate debt has rebounded again, we would like to re-visit the corporate debt issue in this outlook as this will remain a crucial issue for the Chinese economy in 2019 and beyond.”