[News analysis] Talk of China’s looming economic crisis

Average annual debt from 2000 to 2018 according to country

Chinese government isn’t ignoring its financial issues

Average annual debt from 2000 to 2018 according to country

A lot of talk has been going around about a crisis that is poised to erupt out of China. There are two reasons for this. One is that crises have often tended to occur in emerging economies once their per capita gross national income (GNI) passes US$10,000. This is usually the time when accelerated growth comes to an end and an intermediate stage of growth begins; according to this line of reason, crises develop as the hidden defects behind the high growth levels start to emerge. That’s the position where China stands right now.

Another reason is debt. Between 2008 and last year, China’s corporate debt ballooned from US$4 trillion to US$19.8 trillion. It’s clear that it has reached the danger zone. This is echoed by IMF predictions that China’s debt ratio will rise from 256% of GDP in 2017 to 290% by 2022. This wouldn’t be an issue if the increased debt were being put to efficient use; since it isn’t, it is being viewed as a greater risk.

China’s rising debt and rickety finances are not something that just surfaced over the past year or two. The particulars also keep changing: after the initial talk about bad securities, the focus shifted along to way to “shadow finance.” With the ongoing concerns that have been raised about insolvency, the Chinese government has not been merely twiddling its thumbs. It launched measures to reduce the number of bad securities, and those efforts seem to have paid off to some extent.

When a country grows as rapidly as China has, it’s natural for its ratio of debt to GDP to also rise. With a lot of demand for investment and other funds but no money in reserve, the difference has to be bridged through debt. So along with the debt ratio, we also need to observe whether there’s been a sudden rise in the corresponding indicator. If it jumps steeply over a short time, this could lead to problems stemming for the reduced ability to respond to debt. Ordinarily, a dangerous ratio of debt to GDP is said to be one that is 10% or more higher than the long-term trend. China’s level crossed the 20% mark in 2015, but has steadily fallen since then to around the 10% range. This is still high, but it’s finding its way back to normal, and the situation isn’t too bad. Since the government is a majority shareholder in China’s chief banks, they can benefit from policy support, and the formidable controls of the socialist economy suggest that a fairly solid defense against crisis is in place.

For a crisis to happen, people would have to become insensitive to the risks. The government is not concerning itself with the possibility of a crisis either. If it belatedly begins worrying about crisis, the series of measures adopted to avert it could lead to its eruption either being pushed back or not happening at all. A crisis is an abnormal situation. It’s also very rare, and it isn’t appropriate to presume it will happen when developing one’s strategy. The error that arises when a crisis does not occur is just as big as the error that arises when one does.

We tend to look at China through the eyes of Wall Street. That’s why the conclusions about it seem so up and down. Ten years ago, Wall Street was talking about how China would be the biggest economy in the world by 2020. Now they’re saying a crisis might erupt. I have to wonder whether things can really change all that much in the space of 10 years.

By Lee Jong-woo, investment columnist

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