SHB: Extreme levels of debt in China’s enterprises, the Business community

Debt in China has risen to “extreme” levels, in particular in the corporate sector, which is liable to cause a financial crisis. But the relatively low debt in the public sector makes the situation still is manageable. It writes Handelsbanksekonomen Bjarke Roed-Fredriksen in the bank’s “China Update” on Tuesday.

He notes that the total of outstanding credits, in addition to the banking sector, in China now amounts to 170.000 billion yuan, or around 250% of GDP. Private sector debt exceeds 200% of GDP, which is a significantly higher proportion than in the united states at the beginning of the financial crisis.

More worrying, however, is the rate of growth of debt in the corporate sector, which reflects China’s credit and investment driven growth model which is only slowly being balanced against a more konsumtionsdriven model.

READ MORE: Miljardärens warning: The biggest bobubblan ever

The main risk with corporate debt is that there may come a wave of delinquent loans and bankruptcies, which may harm creditors and, therefore, cause a banking crisis and financial instability.

Bjarke Roed-Fredriksen notes that the actual risk is difficult to assess given a complex financial system, but that the official figure for non-performing loans is still on under 2 percent of the outstanding stock is “probably an understatement”.

He notes, however, that the good news is that the risks should be manageable, especially since the debts in the public sector is not excessively high.

“Thus, the authorities have afford to recapitalize the companies and save the banks but to push their own financial situation too hard. Furthermore, China has a current account surplus and only a very low external debt. Thus appears a traditional bytesbalanskris highly unlikely, even if the financial sector would collapse,” writes Bjarke Roed-Fredriksen.

But in order to avoid a financial crisis need credit growth will slow, which is easier said than done.

“But the dangerously high leverage is now a priority for the authorities. Second, the default rate among companies is not accepted, and many insolvent companies have been kept alive. But you should allow more companies to set up payments to show that a cessation of payments may not necessarily be disorderly,” writes Handelsbanksekonomen.

Further, the overdue loans are managed. The authorities were relatively successful in managing past due receivables during the banking crisis of fifteen years ago, but the process will not go as smoothly now, given that the financial system now is more complex and a weaker economic growth makes it more difficult to “grow themselves out of problems,” writes Bjarke Roed-Fredriksen.