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The Chinese Debt Burden

By Anupam Manur

There is a bond market bubble brewing in China as investors seek a safe haven. 

The global financial markets did not enjoy a particularly happy new year. Most markets across the world tumbled on news of Chinese economic slowdown. The Chinese stock market led the way, experiencing 11.6 percent slump in the first week of 2016. It had two emergency stoppages, i.e., trading was halted as the circuit breaker was activated. This spread across the world with Dow, Nasdaq, and even the Sensex having bad days.

There is another interesting thing happening in parallel. Chinese investors are spooked and are retreating from the equity market. They are looking for safer investment options and usually, in times of stress, the flow of funds is usually directed towards the bond markets, especially government bonds. After a prolonged stock market bubble in China in the past few years, there is bond market bubble brewing and it may be headed for a major correction and this is not particularly good news. The Chinese bond market is worth RMB 47 trillion ($7.3 trillion), more than 50% of Chinese GDP.

It is not just China that is experiencing increasing debt. Asian debt has increased exponentially since the global financial crisis: from around 110 percent of GDP in Mar-2009 to 160 percent in Mar-2015. The non-financial private debt in Singapore and Hong Kong is as much as 200 percent of GDP. Normally, It is not uncommon in today’s financial world to see such high debt levels. However, the worrying aspect is that all of these Asian economies are also slowing down considerably, which implies that the ability to repay the debt is considerably reduced.

China debt

Back to China, two major reports in the past week have highlighted the bond market bubble and the slight possibility of a correction – by UBS and Macquarie. Total Chinese debt – government + non-financial corporate + financial institutions + households – account for as high as 282 percent of GDP. In 2001, it was 121 percent of GDP and  158 percent in 2007. Again, the debt problem is compounded by the fact that the Chinese economy is slowing down. Another important aspect is the reduction in Chinese foreign exchange reserves. As the Fed raised interest rates in December, there has been an outflow of foreign currency reserves from China to the tune of $500 billion. A large part of the new bond issuance is coming from Chinese local governments. There has been an explosion in municipal borrowing in 2015 and much of it has been to refinance the previous debt burden.

Local (municipal) government debt in China has increased exponentially

Local (municipal) government debt in China has increased exponentially.

China’s debt numbers are not anywhere close to Japan or Greece or even the US. It is not an alarming figure yet. Growing debt is usually ignored in fast growing economies. However, now that China is slowing down, analysts have just begun to get the Chinese debt on their radar.

Anupam Manur is a Policy Analyst and macroeconomics enthusiast at the Takshashila Institution and tweets @anupammanur

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