The real Chinese debt trap
Credit to Author: BEN KRITZ, TMT| Date: Mon, 27 May 2019 16:18:29 +0000
THE “Chinese debt trap,” the idea that China is carrying out a creeping invasion of the developing world by making large, unmanageable loans and then foreclosing on them has largely been recognized as a fallacy, but the reality may in fact be much worse.
In the wake of the global financial crisis in 2008-2009, China’s GDP growth was halved, from about 14 percent to about 6.5 percent in the span of a year. Just like policymakers in the US and Europe, the Chinese leadership decided massive government intervention was required to prop up the economy, which they did by increasing debt.
And increase it they did: Total debt-to-GDP (combining central government, local government, state-owned enterprise, private enterprise, and household debt) climbed from about 140 percent in 2008 to about 270 percent as of the end of the third quarter of last year. The central government’s debt remained relatively steady, but debt in all the other segments doubled and then some; the biggest share belongs to state-owned enterprises; private enterprises and households combined account for about half of the total.
Those statistics are not alarming by themselves; debt is not necessarily a handicap if it is producing economic value. The problem with China, however, is that expanding debt turned out to be a much blunter tool for encouraging growth than policymakers anticipated. Party leaders had set a target of 8.0 percent GDP growth, but the economy only managed to stay above that ceiling until 2012; since then, it has gradually declined, until hitting the same level as its post-crisis nadir at 6.4 percent at the end of last year.
There are various statistics that can illustrate just how big China’s debt problem is, but the best one is the one that actually describes the consequences of it: In 2014 (according to data gathered by Bloomberg) corporate bond payment defaults in China were practically nil, less than 2 billion yuan. In 2016, defaults jumped to about 30 billion yuan; in 2018, companies missed a staggering 120 billion yuan in bond payments. Through the first four months of this year, defaults already totaled 40 billion yuan, or about $5.6 billion – triple the amount in the same period last year.
To be fair, the amount is a tiny fraction of a percentage of China’s total bond market, which is estimated to be about $13 trillion, or roughly equal to the country’s total GDP. Nevertheless, the growth in China’s default rate is, at least as far as available data shows, the highest in the world. If Chinese government bonds were not relatively stable, which is a function of the central government keeping its own debt growth in check, the wave of corporate defaults might be more noticeable.
So what does all this mean to countries like the Philippines? In direct terms, it can negatively affect the level of Chinese investment in the country; Chinese enterprises that are under debt pressure may have to scale back FDI and purchases of Philippine exports. High levels of existing debt may also reduce the market for Philippine securities, the so-called “panda bonds” that have been so successful thus far. High consumer debt may curtail consumer spending, which again would be reflected in lower exports, as well as private investment and tourism spending.
There are no signs of any of those things happening now, of course, and history over the past decade or so has shown that China has confounded every prediction of an economic crash so far. The more China’s debt grows, however, the narrower the country’s options for unwinding it in a controlled manner become.
The Chinese government’s aggressive efforts to build up its geopolitical influence may in fact be part of a strategy to do exactly that. The next logical step for China to reduce the most dangerous part of its huge debt load would be to initiate a bond buying program, essentially bailing out the most at-risk enterprises by absorbing their debt. In order to do that, however, at least without significantly devaluing the yuan, it will need financing. Establishing a presence across a wide swath of the world provides interest income from loans to develop parts of its Belt and Road Initiative on the one hand, and ready markets for Chinese government debt instruments on the other.
That is the real Chinese debt trap, but instead of trying to lure other countries into it, China is trying to leverage the developing world’s help in getting out of it. That set of circumstances could be very beneficial for countries like the Philippines, provided it is handled in an alert, clear-minded manner.
ben.kritz@manilatimes.net
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