China's $22 trillion time-bomb

Discussion in 'China' started by ejazr, Mar 19, 2012.

  1. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

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    Shankar Sharma & Devina Mehra: China's $22 trillion time-bomb

    For years, a wispy, gossamer dream has been spun by economists working for Wall Street investment banks about how China has managed the impossible: high growth with a very low debt-to-GDP ratio. The dream has been so aggressively sold that almost everybody believes it, including editors of this newspaper who have written glowingly about China’s growth, how far ahead it is of India, how India should give up this race once and for all and so on.

    Like all things churned out by Wall Street, this romantic story is also complete rubbish. Regardless of the level of education, we all behave the same way when we analyse countries: we land at the airport, see multi-lane highways, gleaming skyscrapers in the city centre, massive infrastructure development, teeming shopping malls, tall apartment blocks and golf courses. And immediately jump to the conclusion that this country has done it. It has made it. If you are an Indian, you say this country has left India behind by 100 or 200 years.

    But it is instructive to remember what a crafty villain in an old Hindi movie said: “Har badi kaamyabi ke peeche koi gunaah chhupa hai…” (Behind every great success, lies hidden a great crime).

    Just as behind nearly every rapid economic growth story, lies hidden, debt. Usually lots of it. Just like Ireland that went from being a really poor country in the 1980s to getting to the top of European Union’s per capital GDP league tables — all within 20 years or so.

    China is no exception. The common wisdom is that China runs a very low debt-to-GDP ratio of around 30 per cent (this ratio was in the low 20s till 2007 but jumped sharply during the 2008 crisis), which gives it lots of firepower to keep reflating the economy and to keep recapitalising its banks. The reality is that this ratio is plain wrong. China’s growth model is based on the oldest rapid economic growth hormone available: debt.

    China has debt at various levels and pockets. Let’s add to this central debt, the local government and provincial debt figures. This figure is around $1.9 trillion. Let’s further add the obligations of the Ministry of Railways. That’s $360 billion. And finally let’s also add 80 per cent of outstanding bank credit. This adds $6.3 trillion. We add bank loans to national debt because unlike most countries, China uses banks for nearly all of its directed, policy lending programmes. For example, the stimulus of 2008-09 was financed largely by banks. By pushing its lending via the banks’ balance sheets, China creates the impression of a country that has very low budget deficits and, of course, very low central debt. We take 80 per cent of bank debt into the national debt figures under the assumption that 20 per cent goes towards consumer and private sector credit.

    Now let’s total up the few trillions we have unearthed. As of 2011, this figure amounted to a tad over $10 trillion! And the ratio of total debt to GDP becomes a more ominous 149 per cent. Mind you, there may be other debts that are obligations of the central government that we don’t know about since reliability of data in China is suspect, to say the least. It is eminently possible that debt is understated and GDP overstated.

    But the story gets worse from hereon. China’s growth model is highly capital or, more accurately, debt intensive. We have calculated a ratio called DIG (debt intensity of GDP), that is, the amount of debt needed to generate one unit of GDP. This ratio started out being in the 0.9 to 1.2 range in the first half of the nineties. During the Asian crisis, this ratio worsened to around two as China again threw loads of debt to come out of the slowdown. The ratio subsided a bit to below one in the boom years from 2003 to 2007. But it jumped dramatically to over four in 2008 as China threw a huge amount of money at an unprecedented slowdown. The trouble is that given the overall low growth environment globally and the worsening trade situation for China, generating a unit of GDP growth now requires higher and higher doses of debt. And, in hindsight, we will look back and say this stimulus of 2008-09 was a colossal mistake.

    So what does the DIG ratio lead us to? See the table.

    As we can see, each crisis leads to a worsening of the DIG ratio and, concomitantly, a sharp worsening of the total debt-to-GDP ratio as China starts building bridges and roads to nowhere in order to reflate.

    The bigger problem lies ahead. Given this inclined treadmill model, if China grows faster, the bigger the debt problem becomes. For the sake of calculation, let’s assume the DIG ratio goes to 1.7 over the next four years till 2016 and that China wishes to grow at eight per cent. The total debt-to-GDP ratio at the end of 2016 becomes 180 per cent, up from the 150 per cent of 2011! In absolute terms, China’s total debt will reach $22 trillion. Coupled with a worsening demographic picture, this high total debt-to-GDP ratio becomes a trap from which there is virtually no escape. To compound the problem, China’s private consumption expenditure (PCE) to GDP has declined sharply to 33 per cent from 55 per cent 20 years ago. The ratio of net exports to GDP has fallen to 3.9 per cent in 2010, from 8.8 per cent in 2007. It’s only the ratio of gross fixed capital formation to GDP that has jumped to over 50 per cent in 2011 from 25 per cent a few years ago. As is clear, if China has to maintain its pace of growth, it has to pile on more debt. If it slows down, its social powder keg starts getting incendiary.

    We are not even counting the burgeoning, widespread non-performing loans problem that is looming large and will, in all probability, lead to China’s fourth systemic banking crisis in less than 25 years. If this is a growth model, then it is even worse than the Western growth model.

    So, the bullets China has in order to emerge from this rock-and-a-hard-place situation are few, if any at all. China is indeed riding the tiger. In contrast, India’s is the Toyota Prius of growth models. India should simply avoid the trap of excessive public spending on infrastructure. That’s where almost every country in Asia, including Japan in the nineties to China and Dubai now, has run into problems. India’s growth model is infinitely more robust and time will prove this to a world bedazzled by China.
     
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  3. CherrywoodHunter

    CherrywoodHunter Regular Member

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    so, congratulations to our Indian friends? are you feeling better now?
     
  4. nimo_cn

    nimo_cn Senior Member Senior Member

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    So many time-bombs, which one of them is gonna blow first?
     
  5. s002wjh

    s002wjh Senior Member Senior Member

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    i'm try to figure out where they get the number. there are too many time bombs about china, none have exploded yet.
     
  6. nrj

    nrj Stars and Ambassadors Stars and Ambassadors

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    Chinese ghost towns are unwise & dead investment for sure. All developing countries should take a note of that.
     
  7. john70

    john70 Regular Member

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    China’s Boom Is Beginning to Show Cracks, Analysts Say ... a June 11 article

    SHANGHAI — New economic analyses of China provide further indication that the nation’s supercharged economy is beginning to slow, and warn that soaring inflation, rising labor costs and mounting local government debt threaten to weaken growth even more.
    Enlarge This Image


    Several economists in China have recently lowered their growth forecasts for this year and next year to about 8.5 percent, down from earlier forecasts of 9 to 10 percent, while warning about the possibility of a sharp rise in nonperforming loans at the nation’s big state-owned banks.

    On Monday, for instance, Credit Suisse said data recently released by the Chinese central bank showed that credit in China had expanded at “alarming levels,” far more than previous government estimates suggested. Credit Suisse downgraded its profit forecasts for Chinese companies and state-owned banks, as it warned of slowing growth for the overall economy.

    The reports come at a time of heightened concern about slower growth in other parts of the world, including the United States, Europe and Japan.

    Since the financial crisis, China has been the world’s leading growth engine. But for much of the past year, China has been trying to rein in overly aggressive bank lending as way to tame soaring inflation and property prices.

    Those tightening measures have not only weakened growth in China, analysts say, but have also begun to expose a host of other problems in the nation’s financial system.

    While few analysts expect China’s growth to slow to below 8 percent in the next year, they still paint a troubling picture. The Chinese stock market has been in a slump for much of the last two years, the property market looks weaker and inflation is running at a 34-month high.

    Analysts said exports have begun to show signs of weakness in recent weeks. Credit Suisse said Monday that China’s export growth could be flat in the coming months, partly because of weaker demand in the United States and Europe.

    Credit Suisse’s new figures also indicate that off-balance-sheet lending, much of which took place outside the banking system, pumped a large amount of additional credit into the financial system last year. As a result, Credit Suisse downgraded its ratings of Chinese companies and the big state-controlled banks, and warned of a possible rise in bad loans.

    Vincent Chan, the head of China research at Credit Suisse, said that the nation’s economy might avoid a “hard landing” but that growth over the next year was likely to be less robust.

    “The market consensus is for a soft landing and two or three quarters of slowing down, then a growth rebound,” Mr. Chan said in a telephone interview Monday. But, he said, “we’re saying that after that, the growth may not re-accelerate and the indebtedness may be more serious.”

    Early this month, Wang Tao, the chief economist in China at UBS, warned that over the next few years, loans to local government investment companies could result in as much as $460 billion in nonperforming loans.

    Although Beijing used state-run banks to bolster growth after the financial crisis hit in late 2008, the central government is ordering them to help rein in growth.

    Chinese banks have already raised interest rates and set aside larger reserves. The government is expected to announce additional measures in the coming months.

    While those moves could help slow inflation, they will also probably weaken growth by driving up borrowing costs in China. That could hamper private companies and property developers, which have been among China’s biggest sources of growth.

    Last week, Standard & Poor’s, the credit ratings agency, lowered its outlook on Chinese property developers, predicting that in some parts of the country property sales could drop sharply as a result of tighter credit and government curbs.

    Another growth driver — local government investment in infrastructure projects — has also come under scrutiny from regulators because of worries that overly aggressive spending on new roads, bridges, tunnels, subways and showpiece projects could lead to a wave of nonperforming loans to municipalities.

    Businesses, meanwhile, are trying to cope with rising labor costs, energy shortages and higher borrowing costs.

    Those conditions could change if the government decided to loosen monetary policies and ramp up growth, the way Beijing did in early 2009. But Mr. Chan at Credit Suisse said the size of China’s debt could restrain regulators and lead to a longer period of slower growth.

    Asked whether nonperforming loans — or N.P.L.’s — are set to rise, Mr. Chan said: “A rise in N.P.L.’s is a must. The question is, how much will they rise?”
     
  8. no smoking

    no smoking Senior Member Senior Member

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    Where the number comes from is not important, the point is that China is doomed in our indian friends' world. So, just wait and see.

    If china doesn't collapse this year, then next year, or next decade..... they can keep going on and on as long as the earth is still here. One day, their dream will come true.
     
  9. john70

    john70 Regular Member

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    Sarcasm wont help much here. V r just discussing some scenarios which according to some scholars may emerge with present available data. Even india or all of the world wont benefit from a china economy burst. So neither it is our wish or dream to see china economy going down or busting. It is not related to love for china or hate...just pure economics.
     
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  10. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

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    The point being made is that GoI does not provide financial backing to private banks off the books.

    In China, all major companies like banks, railways e.t.c. are backed by the Chinese govt. So if you add only the railways debt and the debt of the major banks to Chinese govt. debt that give around 150% debt to GDP ratio.
    If you add muncipal and provicial debt, it would go even higher.
    India's govt. debt both state and centre together is around 65% and is following a declining trend when it was 85% of GDP in 2004. These are the points being debated.
     
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  11. john70

    john70 Regular Member

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    Sarcasm wont help much here. V r just discussing some scenarios which according to some scholars may emerge with present available data. Even india or all of the world wont benefit from a china economy burst. So neither it is our wish or dream to see china economy going down or busting. It is not related to love for china or hate...just pure economics.
     
  12. cir

    cir Senior Member Senior Member

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    Oh, not again! Not another time bomb!! :rofl:

    Our Indian friends can now sleep tight and sound in the safe knowledge that China is about to burst into a puff of hot air.
     
  13. badguy2000

    badguy2000 Respected Member Senior Member

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    the total debt of CHina's railway ministry is less than 2 trillion RMB, China's GDP 2011 is 47 trillion RMB...

    So, obvioulsy, you claim is clueless.....such clueless statement just discredit all your words.
     
  14. J20!

    J20! Senior Member Senior Member

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    Dudes, China is here to stay, for decades to come, India will lag behind China economically, all this dreaming about China magically collapsing wont do you any good. Work on your own country and stop fantasizing about a Chinese collapse.
     
  15. G90

    G90 Regular Member

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    Indians know they are hopeless against China, so it is only natural for them to think that China will collapse one day to make themselves feeling better, otherwise the life would have been too miserable for poor indians.

    These west jokers keep being wrong on predicting China for the past 30 years, it already established a negative correlationship between China's economy performance and the west jokers' wishful thoughts.
     
  16. Chan Lankela

    Chan Lankela Regular Member

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    Double Post
     
    Last edited: Mar 20, 2012
  17. huaxia rox

    huaxia rox Senior Member Senior Member

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    indians just dont seem to know how to invest in infrastructure....hundreds of SEZs built by and large for nothing....and they talking about the sore ghost town in prc....how rediculous is that.....and indians talking Japan in the nineties to China and Dubai now....either of the 3 has much better economic outcomes than indian.....why dont u guys talk about somalia then?? u can try avoiding dumping money on infrastructure buildups and depts like somalia cant u?
     
  18. Chan Lankela

    Chan Lankela Regular Member

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    Mmmm for some reason my comment didn't post, I'll have to write it up again.

    Anyway, Mr G90 and every other member who is posting on this thread. Please be aware that the point of this thread and the stimulus it provided were to conceive an intelligent discussion as to the implications of said problem. China's collapse would not benefit anyone (except maybe Tibet), let us discuss what can be done to prevent a collapse IF the stimulus provided was accurate in the ideas it presented.

    Thank you

    Now let us please have a civil discussion :), sorry if my english is bad.
     
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  19. W.G.Ewald

    W.G.Ewald Defence Professionals/ DFI member of 2 Defence Professionals

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    "It's not personal, it's just business." - - Michael Corleone
     
  20. W.G.Ewald

    W.G.Ewald Defence Professionals/ DFI member of 2 Defence Professionals

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  21. panduranghari

    panduranghari Senior Member Senior Member

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    If anyone among you ladies is an economics graduate, I will be happy to discuss the article. If not its a waste of time.
     
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