Will China’s booming corporate debt cause another global financial crisis?
Will China implode on booming corporate debt?
As of 2017 figures, China has had one of the highest % of corporate debt to GDP around the world at 168%. This should not come as a surprise as the alarm bells have been ringing for quite a long time.
China’s President Xi JinPing has seen this risk and has started to tighten the taps for credit to these firms. As seen in this article, this move greatly affects the developers in China as they no longer have the adequate liquidity to carry on their debt-fuelled growth. This will cause the small and large developers to feel the squeeze first.
Signs of A Bubble Trouble!
I have attended a few talks with discussions on how to identify property bubbles. In general, they tend to have this outward concentric nature to them. This means that property bubbles will start in a central region and begin moving outwards to the rural areas as time goes on. This is evident here where China’s property boom has moved outwards to the smaller cities where China’s new home price growth hits two-year high.
Crack lines are forming
According to this article, companies have defaulted on at least 20.7 billion yuan ($3.9 billion) in yuan bonds and $350 million in dollar debt in the six months through June, which is a 40% increase compared to the same period last year. Mind you that’s $3.9 billion which contains nine zeroes.
According to this article, developers are getting desperate and are dangling carrots to offload their apartments and developed/developing units to willing buyers. This seems extremely odd given that there is a property market boom and discounts in the range of 10% are being given. The desperation could hint to the vulnerability that Chinese developers are feeling with the current tightening of measures.
While there are people arguing that the boom is sustainable , I don’t believe so, at least in the short to mid term. My view is that the potential combination of reduced liquidity, dumping of property by Chinese developers and weakening of economic growth which will cause prices to fall dramatically in the short-medium term.
Is this the end for China’s growth story?
However, with all the doom and gloom being said, I feel that China will not experience such a severe downturn like the 2008 Global financial crisis seen in the US. This is because China’s heavy-handed policies and controls will allow it to control the flow of information and restrict the home prices, artificially, from falling. Additionally, if there is the drying up of demand for homes and developers start defaulting on a country-wide scale, the government can backstop losses due to their reserves they have accumulated.
In conclusion, I applaud Chinese govt for tightening liquidity, perhaps too late but better late than never, and stopping the flow of easy money to their corporations. From history, we learnt that excess liquidity brings about a lot of issues. As seen from 2004 to 2008, where debt fuelled speculative economic growth eventually derailed the country and the global economy. Despite the policies that will soften the impact of a landing, brace yourselves for a bumpy ride.
Cheers & Good Luck