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70 Deleveraging, What Deleveraging As a consequence, China is facing a poisonous combination of high, fastgrowing leverage and slowing nominal GDP (Figure 4.27). This, in turn, suggests growing difficulties in servicing and repaying debt in a number of sectors in the future are likely. These difficulties might be exacerbated by the fact that market rates are likely to increase as a consequence of ongoing financial reforms. Figure 4.27 Chinese leverage and underlying nominal GDP growth 17.0 16.0 China: Nominal growth (HP filter) China: Total debt/GDP (rhs) 220 210 15.0 200 14.0 190 13.0 180 12.0 170 11.0 160 10.0 150 9.0 05 06 07 08 09 10 11 12 13 Source: Authors’ calculations based on national account data. 140 In addition to these patterns, the debt situation in China is made even more fragile by two further considerations. First, the recent increase in debt was raised especially by relatively weak borrowers, such as local governments with fragile income streams and, in particular, companies active in construction and other sectors (e.g. the steel producing industry) plagued by overcapacity (the driver of private debt in Figure 4.26). Second, credit was granted by relatively weak lenders, as shown by the sharp increase of the weight of shadow banking (trust funds, etc.) within total lending (Figure 4.28). These factors help to explain the Chinese effort for structural reforms aiming at supporting potential growth and breaking the formation of a vicious spiral between leverage and growth. The success of this effort will be crucial to the future of China. However, it is legitimate to be sceptical about the potential of reforms to boost short-term growth, even reforms that are successful in the medium term. In China, as elsewhere, it is hard to identify in advance the leverage breaking point beyond which a crisis enfolds. It is less hard, however, to interpret the current debt dynamics of debt as unsustainable. Most likely, the Chinese government is aware of the adverse dynamics that we have described and is willing to start a process of deleveraging. At least initially, this process should be in the form of a moderation in the pace of the leveraging up of the economy. However, there will
Case studies 71 be a price to pay for this policy since slower credit formation, the main support for growth in recent years, would likely translate into a substantial slowdown in activity. Figure 4.28 Chinese debt breakdown by lenders China total lending breakdown, 2008 Central gov. debt 11% Non-banking financing 23% Bank loan 66% China total lending breakdown, 2012 Central gov debt 7% Non-banking financing 33% Bank loan 60% Source: Authors’ calculations based on national data. This takes us to the difficult analysis of what lies ahead for China, or better, what kind of crisis we should expect. Following our taxonomy in Appendix 3A, should we expect full-blown ‘Type 1’ or ‘Type 3’ crisis, or a slow-burn ‘Type 2’ crisis The breakdown of the Chinese debt displayed in Table 2.1 offers some crucial elements for the analysis. Let us highlight the following facts: (a) the government has a low debt relative to GDP (49% of GDP if one includes local governments, 26% for the central government only); and (b) Chinese debt is virtually all domestic, similar to that of Japan. These conditions mean that the central government has at the current stage the resources to contain systemic risk (for instance, intervening to avoid a ‘too-big-to-fail’ default) and that policymakers have very little incentive to proceed towards an explicit default, since it would hurt mainly domestic investors. Therefore, a Russian or an Argentine default scenario is not likely since in both those cases, the bulk of debt was held by foreign investors,
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Geneva Reports on the World Economy
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International Center for Monetary a
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International Center for Monetary a
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Acknowledgements We thank Susan Lun
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List of Conference Participants Edm
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List of Conference Participants xi
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List of Conference Participants xii
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Foreword Since 1999 the Geneva Repo
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2 Deleveraging, What Deleveraging 1
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2 Global debt analysis: Deleveragin
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Global debt analysis: Deleveraging
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Page 105 and 106: 6 Discussions Morning discussion Ma
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