“Doomsayers have plenty to work with in China,” says Andrew Polk of Trivium/China, a Beijing-based research firm, speaking primarily of China’s phenomenal debt-to-GDP ratio, which has ballooned from 160 percent less than a decade ago to 260 percent today. It “seems almost guaranteed to herald a financial crash or at least a major correction, quite likely followed by years of stagnation,” he writes in Bloomberg View.
But Polk actually argues the opposite: Several signs show that China may be about to turn the corner on debt, or at least mitigate the worst effects of it. These signs are:
- A rapidly diminishing credit intensity ratio. Whereas in the first halves of the years 2012-2016, China took on average over four dollars in loans to create just one dollar of GDP growth, this year to date it has taken just 2.9. That’s almost a 30 percent reduction.
- A commodity boom — in steel, coal, oil, and gas — is helping some of China’s most indebted companies “to service their existing liabilities, which means they don’t have to take on as much new debt to pay off the old.”
- Finally, Polk calculates that 12 percent of China’s corporate debt has been renegotiated in a productive way since the middle of 2016, as a result of “China’s banking regulator…pushing financial institutions to establish creditor committees.”
Read more selections from the cascade of recent commentary on debt in China on SupChina:
- July 14: China’s economic growth is steady, but many challenges remain
- July 21: State-owned companies still addicted to debt
- July 26: A real overhaul of China’s state-owned enterprises?
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