China corporate debt ‘poised to overtake US’
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China corporate debt ‘poised to overtake US’

How do you measure your newly-acquired global player status? In many ways. One of them is how much debt you have and how threatening that could turn out to be for other countries.

So far, the world’s chief debtors were mostly located in the West. The US total debt is gigantic, and Europe’s recent crisis has been all about how much countries have to pay and what reform might make them sustainable.

But there is a new kid on the block: China. According to a new report by Standard & Poor’s, the People’s Republic has now joined the club.

The fresh analysis points out that “China is poised to overtake the U.S. as the country with the world’s largest corporate debt wall in 2014 (if debt grows at 1.2x nominal GDP growth) or 2015 (assuming 1.0x nominal GDP growth).” That means that Chinese companies are expected to borrow gigantic amounts of money in the next couple of years: “in the former scenario, China’s nonfinancial corporations would owe $13.8 trillion in 2014, versus U.S. corporations’ $13.7 trillion–and, in the latter scenario, $14.7 trillion in 2015 versus $14.1 trillion.”

The research also suggests that the debt of the Asia-Pacific region could soon be bigger that of the West: “in a similar vein, but over a longer-term horizon, Asia-Pacific could have more corporate debt than North America, the eurozone, and the U.K. combined by 2017, regardless of whether debt grows at 1.2x the nominal GDP growth of each country or 1.0x nominal GDP.”

Chinese debt started took an upswing after the financial crisis when the government in Beijing allowed the economy to be flooded with credit in an effort to fight economic headwinds. It worked. Chinese growth rates soon bounced back to over 10 percent and even now, in spite of a consistent slowdown, GDP increases at over 7 percent a year.

According to S&P’s, China’s corporate debt is poised to continue increasing even beyond the immediate future. In its report, the agency argues that Chinese debt has grown as a result of the country’s large investments in manufacturing, infrastructure and real estate, which are underpinned by credit. Besides, Chinese banks have not been impacted by the crisis in the way that European and American ones have been: thus, they have kept on lending and they could well keep on doing so. “Absent a more substantial rebalancing of the economy toward consumption, away from investment,” reads the paper, “China’s corporate debt growth is likely to continue at a fast pace for the foreseeable future.”

The rise of corporate debt is surely an indicator how far East Asia has come in the past few decades, but it also carries some negative implications. First, it is not clear whether the trend can be safely sustained over the coming years. “China has had a remarkable three-decade run without suffering a year of recession,” reads the report. However,  “while it is tempting to say that China’s economy can grow at such a level for another 20 years, we suggest that the risk of a correction may continue to be building.”

According to many, investments made during the post-crisis period were not all that productive and pressure may increase in the near future. There is much talk about a housing bubble ready to pop. Furthermore, a particularly troublesome aspect of China’s credit binge is that a significant part of it is financed through the so called ‘shadow banking sector’ – essentially, non-banking institutions loaning money to companies. According to S&P’s, the shadow banking sector finances somewhere between one third and one quarter of China’s corporate debt. That, given China’s bulging economic size, means that up to 10 per cent of global corporate debt is exposed to Chinese shadow banking: a crack in the system that affects everyone.