On debt... a comprehensive analysis by HSBC
full write up here, grab a drink, it's 28 pages long:
abstract posted below
China Inside Out ECONOMICS
CHINA
How worrying is China’s debt?
Recent data have been better than expected. The delivery of the stimulus promised at the National People’s Congress (NPC) in March should help sustain this rebound into 2H 2016. And yet pessimism about China’s economy has not gone away. The focus has shifted from growth to structural issues, such as the debt burden. Some argue that China’s debt-to-GDP ratio has already reached a point that could lead to systemic risk and derail growth. We disagree. Simply comparing China’s debt-to-GDP ratio with other countries is misleading, in our view. It is important to put China’s debt into perspective.
China’s debt-to-GDP ratio is indeed high, reaching 250% at the end of last year. Yet this must be seen in the context of China’s unusually high saving rate, which has
stayed above 40% for two decades. Savings are not distributed evenly in the economy. The household sector is a net saver – families save more than they can
invest – while the corporate sector is a net borrower. The result is that the higher the saving rate, the higher the borrowing. Our regression analysis using debt data from the Bank for International Settlements (BIS) suggests that every 1ppt increase in the national saving rate implies a 3.6ppt rise in the debt level. From this perspective, China’s debt levels are consistent with its high saving rate.
Another factor is the structure of the financial system. With banks dominating, the household sector’s surplus savings have been transferred into corporate investment
through bank lending rather than equity financing, leading to faster debt accumulation. Equity financing accounted for less than 5% of total financing in the economy in the last decade. The rest was via debt financing, with bank lending accounting for over 70%.
Our analysis suggests that China’s debt levels have not reached a crisis threshold. This implies Beijing can and should continue to ease policy to fight deflation. Some worry that stimulus will allow Beijing to “kick the reform can down the road”, but the data so far suggest that most of the easing has gone to support needed infrastructure investment and mortgage lending. Investment in sectors with overcapacity is slowing. We believe reform and reflation are not contradictory. In fact, as policy easing can help contain the risks of a ‘debt deflation trap’, it can help facilitate the reform agenda by making it easier to reallocate labour and capital resources in the restructuring process.
