China’s corporate debt pile is a problem. It is massive and it is growing. Currently, it shows no signs of slowing, yet the economy as a whole, is definitely slowing down in China. It is a problem that has now begun impacting China’s stock market, and a problem that has become of overwhelming concern for those in the Asian markets and beyond. The debt crisis in Greece has been getting most of the attention because it is a problem that is good for coverage. It is a starving power in the global picture, and while implications exist for the U.S., they’re largely limited due to how small the overall Greece economy is at its core.
China is a different beast. Right now, China’s corporate debt sits at $16.1 trillion. For those who think that number is high – just think about the fact that the country could see a swelling of as much as 177% in the next five years. In just five years, economists believe that China’s corporate debt could reach an astonishing $28.8 trillion. It is already significantly higher than the corporate debt level of the United States, and as it grows will continue to do damage to its own economy in the process.
Louis Kuijs a chief economist for Greater China pointed out that the problems are long-term, and will definitely need to be addressed. As China has intervened oftentimes, and pulled interest rates, or made it easier for lenders to get money in the hands of those who need it – the risk is that money is going to places where it cannot be paid back, or risky investments. Kuijs said of the change that, “When the credit taps are opened, risks rise that the money is going to ‘problematic’ companies or entities.”
The biggest problem seems to be around investment loans. Meaning, loans that have short-term implications. Those loans exist and are being handed out frequently. However, while that has helped the economy and stock market in temporary bursts – the bigger problem is that the long-term lending, which leads to good economic benefit are becoming few and far between.
Gao Hong of Jinxie Axle Co pointed out that, “The risk for these (capital) programmes is so high and the rate of return so low that we have to make the best decision for our investors (by) purchasing bank products. Last year, we made profits thanks to the sale of CNR shares,” when talking about the types of loans that are being issued.
In a way, the Chinese economy is manufacturing business, by only putting together certain loans, which make a more productive economy difficult to achieve. How this will play out in the long-term remains to be seen. However, it would not be surprising to see something major happen within the Chinese economy over the course of the next several months to add