china's debt map zhang srs jf formated … ·...

Mapping China’s Debt ProblemWeiqi (Gloria) Zhang

2

Part I: China’s Debt Metrics

Part II: China’s Debt Profile

Part III: China’s Debt Burden

China’s total debt has climbed to 243% of GDP.

• The share of debt to GDP has risen in China from 148% of GDP in December 2008 to 243% of GDP in June 2015.• The total credit breaks down by borrowing sectors, including non-‐financial corporations (both private-‐owned and public-‐owned), households, and general government (central, state and local governments and social security funds).• Private debt (private non-‐financial corporations and households) has accounted for most of the increase in total credit during this period.

Non-‐financial corporations

Households

General government

0%

50%

100%

150%

200%

250%

300%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Mar, 2006

Sep, 2006

Mar, 2007

Sep, 2007

Mar, 2008

Sep, 2008

Mar, 2009

Sep, 2009

Mar, 2010

Sep, 2010

Mar, 2011

Sep, 2011

Mar, 2012

Sep, 2012

Mar, 2013

Sep, 2013

Mar, 2014

Sep, 2014

Mar, 2015

Percent a

s of G

DP

RMB in billion

Total Credit Non-‐financial corporationsHouseholdsGeneral governmentTotal credit-‐to-‐GDP ratio

Total credit-‐to-‐GDP ratio

Sources: BIS, National Bureau of Statistics, CEIC

3

The pace of private debt growth poses the greatest risk of an economic crisis.• Private debt increased from 123% of GDP in December 2008 to 206% of GDP in June 2015—far exceeding the pace of normal credit expansion.• In the 5-‐year period from January 1, 2009 to December 31, 2013, the private debt-‐to-‐GDP ratio increased by 75 percentage points• In the 5-‐year period from January 1, 2010 to December 31, 2014, the private debt-‐to-‐GDP ratio increased by 52 percentage points.

-‐20%

0%

20%

40%

60%

80%

50%

100%

150%

200%

250%

Dec-‐07

Jun-‐08

Dec-‐08

Jun-‐09

Dec-‐09

Jun-‐10

Dec-‐10

Jun-‐11

Dec-‐11

Jun-‐12

Dec-‐12

Jun-‐13

Dec-‐13

Jun-‐14

Dec-‐14

Jun-‐15

Private debt-‐to-‐GDP and 5-‐year credit growth

Private debt to GDP (LHS)

% of GDP

(RHS)

Private debt to GDP (LHS)

% of GDP

(RHS)

Source: PBoC, MOF, BIS, CEIC, New America Foundation

4Note: Some of China’s private sector credit was used by state and local governments and therefore may be overstated. BIS data on China’s foreign bank loans and foreign securities were not available prior to June 2007 and June 2005, respectively. Their amounts are small and should have a meaningful impact on debt-‐to-‐GDP.

Debt has significantly outpaced GDP since 2008.• Since 2009, debt growth has outpaced GDP growth, signaling wasted investment and the risk of a future crisis.• Credit growth has averaged 20% per year since 2009, nearly twice the pace of GDP growth.• But credit growth has slowed down in the past two years, from 21% in March 2014 to 11% in June 2015, reflecting in part the fact that companies are more reluctant to take on more debt and in part that the government has taken steps to rein in credit expansion.

0%

5%

10%

15%

20%

25%

30%

35%

Dec-‐07

Jun-‐08

Dec-‐08

Jun-‐09

Dec-‐09

Jun-‐10

Dec-‐10

Jun-‐11

Dec-‐11

Jun-‐12

Dec-‐12

Jun-‐13

Dec-‐13

Jun-‐14

Dec-‐14

Jun-‐15

Credit growth and nominal GDP y/y % change

Source: National Bureau of Statistics, People’s Bank of China, CEIC,

Credit growth

GDP growth

5

China’s dependence on credit has increased from 2007 to 2015.

• China’s credit intensity—the amount of debt required to produce a unit of GDP-‐-‐increased from 1.1 in 2007 to nearly 3 in 2015.

• China’s credit intensity is much higher than that other comparable emerging economies.

• By comparison, Thailand’s credit intensity is 1.7, Malaysia’s is 1.6, and India’s is 0.4. 0

0.5

1

1.5

2

2.5

3

3.5

China Thailand Malaysia India Indonesia

Credit Intensity of GrowthChange in nominal debt/change in nominal GDP

2005-‐07 2Q15

Source: BIS, CEIC, HSBC, OECD

6

China’s debt-‐buildup exceeds that of other economies that experienced crises.• China’s private debt has increased by 52 percentage points since 2009 and hit 203% of GDP in 2014, before further expanding to 206% in June 2015. • China’s private debt-‐to-‐GDP rate in 2014 was higher than the US’s in 2007 (171%), South Korea’s in 1998 (169%), and almost as high as Japan’s in 1991 (213%).• China’s private debt-‐to-‐GDP ratio increased faster in the last 5 years than did Japan’s (1986-‐1991, 39 percentage points), US’s (2002-‐2007, 28 percentage points), and Korea’s (1993-‐1998, 32 percentage points) in the five years prior to their crises.

0%

50%

100%

150%

200%

250%

China 2009-‐2014

US 2002-‐2007

Japan 1986-‐1991

South Korea 1993-‐1998

Indonesia 1993-‐1998

Growth of private debt-‐to-‐GDP ratio in 5 years before the crisis

Sources: UN, BIS, CEIC

7

RMB bank loans account for the largest share of credit.

• Bank loans consist of about 66% of the total credit in China. Of these, 42% are short-‐term loans, while 58% are medium-‐to-‐long term loans. • As of 2Q15, bank loans in RMB totaled an equivalent of 138% of • Foreign securities and foreign bank loans account for 10.74% of GDP, which is less than 2% of China’s total credit.

-‐

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Jun, 2007

Apr, 2008

Feb, 2009

Dec, 2009

Oct, 2010

Aug, 2011

Jun, 2012

Apr, 2013

Feb, 2014

Dec, 2014

RMB billio

n

Total creditForeign securities

Foreign loans

Central Govt Debt

Corporate Bond

BAD

Trust Loan

Entrusted Loan

FX Loan

RMB Loan


8

Banks provide most credit, but non-‐bank financing is increasing its share.

• Non-‐bank lending increased as a share of total credit from 22% in 2008 to 32% in June 2015.• During the same period, bank loans as a share of total credit declined from 78% to 66%.• This reflects in part the efforts of the central government to tighten lending in the official banking sector and in part the deepening of China’s financial sector.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bank share of lending

Bank on-‐shore

Nonbank on-‐shore

Source: National Bureau of Statistics, People’s Bank of China, CEIC

9

Non-‐bank or “shadow” bank lending has grown.• “Shadow” bank lending has increased 6.2x since from the end of 4Q08 to 2Q15 .• Entrusted loans (18% of GDP) are loans made between corporate entities that are registered but not guaranteed by domestic banks. • Trust loans (8% of GDP) are loans issued by trust companies. Trusts created by securities companies and asset management companies are not included in this figure. Trust loans may be as much as 15% of GDP, according to Fitch ratings.

-‐

5,000

10,000

15,000

20,000

25,000

2007

2008

2009

2010

2011

2012

2013

2014

2015

RMB billio

n

"Shadow" banking

Bankers Acceptance Draft

Trust Loan

Entrusted Loan


10

Foreign debt is low but has been rising in recent years.

• Foreign debt, which includes borrowing from banks abroad and issuance of debt securities, amounts to only 10.74% of GDP. But it has been increasing. • Foreign debt grew 28% from June 2014 to June 2015.• Foreign securities make up 42.5% of China’s foreign debt and foreign loans make up about 57.5%. -‐20.0%

-‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Growth in foreign bank borrowing and security issuance

Source: BIS

11

The financial sector accounts for most of the borrowing from foreign banks.• From 4Q08 to 2Q15, the foreign debt of financial firms increased from 1.6% of GDP to 4.9% of GDP. • During the same period, nonfinancial firms’ foreign debt levels increased from 2.7% to 5.7% of GDP and government foreign debt increased from 0.7% to 1.1% of GDP. • China’s financial-‐sector foreign debt is mostly associated with domestic banks that are involved in trade financing and that extend credit through letters of credit discounting.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Foreign borrowing is concentrated in the financial

sector

Government

Non-‐financial private

Financial

Source: BIS

12

Foreign borrowing is mostly from Hong Kong banks.

• The Hong Kong Monetary Authority estimates Hong Kong banks to have $590B of exposure to non-‐banks in mainland China, as of 2Q15. • This represents 196% of Hong Kong’s GDP and roughly 23% of its banking assets. • As of 2Q15, 44% of loans made from Hong Kong to mainland China are to state-‐owned enterprises (non-‐private entities).

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$B

Hong Kong's banking sector's non-‐bank China exposure

Source: Hong Kong Monetary Authority, New America

13

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Corporations and local governments account for the great majority of China’s debt.

• As of 2013, corporations and local governments together account for 82% of China’s debt.• From 2008 to 2013, local government and corporate debt increased by 74 percentage pointsof GDP. This accounted for 89% of the increase in total debt-‐to-‐GDP from 2008 to 2013.• By contrast, household debt and sovereign central government debt accounted for very little of the increase in total debt.

0%

50%

100%

150%

200%

250%

300%

2008 2009 2010 2011 2012 2013

Debt as a share of GDP

Central Government

Local Government

Mid/large Corporate

Small Business

Household

Source: ChinaNational Statistics Bureau, Morgan Stanley, Starfort

15

Liabilities of state-‐owned enterprises are RMB 77tn or 117% of GDP as of 3Q15.

• Liabilities of companies in China’s state sector have increased 3.1x since 4Q08. • During this period, the ratio of liabilities in state-‐owned firms to GDP has increased from 79% of GDP to 117% of GDP. • Total liabilities of state-‐owned enterprises is a proxy for, but may somewhat overstate, debt.

0%

20%

40%

60%

80%

100%

120%

140%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Dec-‐07

Jun-‐08

Dec-‐08

Jun-‐09

Dec-‐09

Jun-‐10

Dec-‐10

Jun-‐11

Dec-‐11

Jun-‐12

Dec-‐12

Jun-‐13

Dec-‐13

Jun-‐14

Dec-‐14

Jun-‐15

% of G

DP

RMB billio

n

State-‐owned sector total liabilitiesSOE liabilities SOE liabilities to GDP

Source: MOF, CEIC, New America Foundation

16

Trust investments are smaller, but are invested in similar industries as bank loans.

0

2000

4000

6000

8000

10000

12000

14000

16000

RMB billio

n

Trust investments by sector as of 2Q15 Real Estate

Securities market

Other

Financial Institution

Basic Industry

Industrial & Commercial Enterprise

Source: China Trustee Association, New America Foundation

17

• Trust assets can be invested directly into companies or into financial securities.

• 39% of trust assets are invested directly in industrial & commercial enterprises and basic industry.

• 35% of trust assets are invested in financial institutions or securities markets and 8% is invested in real estate. Other investments account for 18% of trust assets.

Debt financed a boom in fixed asset investment. But the pace of investment has declined in recent years.• Fixed asset investment grew more than 30% annually from 2008 to 2012, before beginning to decline to less than 10% in 2015.• Growth in fixed asset investment has fallen from 34% in 2009 to 1% in October 2015 but still accounts for a disproportionate share of China’s economy.• Growth in fixed asset investment has fallen for private, state-‐owned, and LLC corporations alike.

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Annual change in fixed asset investment, by firm type

Private State owned LLC

Source: National Bureau of Statistics, CEIC

18

Fixed asset investment is concentrated in manufacturing and real estate.• Manufacturing and real estate account for 58% of China’s total fixed asset investment, much of which is debt-‐financed.• Fixed asset investment in manufacturing and real estate grew by 38% and 31%, respectively from 2010 to 2011, but the pace of growth has since declined.• From 2013 to 2014, investment growth slowed to 13% for manufacturing and 11% for real estate.

0

10,000

20,000

30,000

40,000

50,000

60,000

2003 2005 2007 2009 2011 2013

Manufacturing and real estate make up 58% of fixed asset investment as of 2014

Other

Transport, storage and postalConservation

Electricity, gas, waterMining

Agriculture

Real estate

Manufacturing


19

Excess investment has led to overcapacity and falling levels of profitability.

• The high rates of fixed asset investment have resulted in overcapacity, falling levels of utilization, and lower profitability.• In 2013, China’s State Council identified five sectors as having serious overcapacity—cement, aluminum, sheet glass, shipping, and steel.• The National Development and Reform Commission announced that 21 of the 39 sectors have more than a quarter of capacity idle.

20

0

10

20

30

40

50

60

70

80

Percent

Capacity Utilization

The return on equity of state-‐owned firms has fallen since 2007.

• The return on equity (ROE) of state-‐owned firms dropped from over 12% in 2007 to below 6% in 2012 as overcapacity increased. • Profit margins-‐-‐which are a reasonable proxy for ROE-‐-‐have declined slightly since 2012, falling from an average of 5.1% in 2012 to 4.9% through May 2014. • In 2007, average profit margins were 8.9%, nearly double what they are today.

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 2008 2009 2010 2011 2012

State-‐owned enterprise return on equity

Source: MoF, CEIC

21

Real estate investment has risen as a share of GDP.• Real estate investment as measured by the National Bureau of Statistics* has increased from 5.0% of GDP in 2000 to 14.9% of GDP in 2014. • By comparison, in the United States, investment in non-‐residential structures and residential real estate peaked in 2005 at 9.4% of GDP.• Real estate accounts for 20% of fixed asset investment and 19% of bank loans, and is frequently used as collateral by borrowers.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Real estate investment as a share of GDP

China

US

Source: National Bureau of Statistics, Bureau of Economic Analysis

22* The figure for China’s real estate investment is not a direct input to GDP.

More real estate is being built than is being sold.• Across 40 Chinese cities, the ratio of floor space started to floor space sold rose from 1.2x in 2007 to 1.5x in 2014.• Similarly, the amount of floor space under construction relative to floor space sold increased from 3.4x in 2007 to 6.7x in 2014.• The ratio of floor space started to floor space sold hit a peak in 2011 of more than 1.8x before declining to 1.5x in 2014.

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

1.8x

2.0x

2007 2008 2009 2010 2011 2012 2013 2014

Ratio of Floor space started to floor space sold

Source: National Bureau of Statistics

23

Real estate prices in Tier 2 cities have declined, while prices in Tier 1 cities continue to increase.• Prices in Tier 2 cities have gone down continuously since 2011. In Wenzhou and Zhejiang, prices have fallen over 20% from the peak in 2011.• Real estate prices in Tier 1 cities have continued to increase after a modest decline in 2012.• Declining housing prices affect local governments in two ways. If housing prices decline, local governments receive less revenue from land sales and their access to credit declines because land is used as collateral for borrowing.

70

80

90

100

110

120

130

140

Jan, 2011

Jul, 2011

Jan, 2012

Jul, 2012

Jan, 2013

Jul, 2013

Jan, 2014

Jul, 2014

Jan, 2015

Jul, 2015

Prices on new constructed residential real estate

Beijing Shanghai Guangzhou

Chongqing Wenzhou


24

Government debt is rising, but is under control for now.• In June 2013, the National Audit Office conducted a survey and found contingent liabilities for local governments and the national government were 33% and 23% of GDP, respectively.• This includes total debt and all contingency payments. Debt with direct payment obligation by the local and central government were 20% and 18% of GDP, respectively. • This is far below government debt levels for many other emerging economies.

0% 20% 40% 60%

Contingent Liability

Have Repayment Obligation

Warranty

Responsibility for Certain

Relief

Government debt

Local government debt

Central government debt

Source: National Audit Office, CEIC, New America Foundation

25

Local government debt has increased and could become a problem in the future.• China’s National Audit Office has estimated that local government debt was CNY 17.9T in June 2013, or 33% of GDP. This is up from 27% of GDP in December 2010 and 17% in December 2007.• This includes obligatory debts as well as debt that has been guaranteed and “responsibility for certain relief.” • The amount of debt the government will ultimately be liable for depends on the health of the economy and whether borrowers are able to repay interest and loans.

0%

5%

10%

15%

20%

25%

30%

35%

2007 2008 2009 2010 2011 2012 2013

Local government debt as a percent of GDP


26

Local governments take on debt because they have lost their other revenue sources.• Local governments cannot directly issue debt and the central government centralized the largest sources of local government revenue including the value-‐added tax (VAT), resource tax, personal income tax, and enterprise income tax. • This has forced local governments to create Local Government Financing Platforms (LGFPs). This in turn has made local governments dependent on debt and the local property market. According to the National Audit Office, LGFP debt was RMB 7T in June 2013.

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

Dec, 1980

Dec, 1985

Dec, 1990

Dec, 1995

Dec, 2000

Dec, 2005

Dec, 2010

Dec, 2015

Local government squeezeLocal government expenditure share of total expenditure

Local government revenue share of total revenue

Source: Ministry of Finance, CEIC

27Source: IMF

Local governments borrow mostly for construction and infrastructure.• According to the National Audit Office, 59% of local government borrowing is for construction and transportation.• Just 6% of local government spending is devoted to education, culture, and health.• Land purchasing makes up 11% of spending and represents about a third of revenues. Land sales are still a net source of local government funding, but they are finite and may be finished by 2021.

35%

24%

11%7%6%

17%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Local governments borrow mostly for construction and infrastructure

Other

Education, Culture & Health

Affordable Housing

Land Purchasing

Transportation

Construction


28

29




The interest rate on China’s debt has been low but real rates are increasing as inflation declines.• The weighted average interest rate is 6.0% as of 2Q15. Many firms, however, borrow for less. • If total debt-‐to-‐GDP is 243%, the interest expense would be 14.7% of GDP, a sizeable burden by international standards. But the interest burden for many sectors of the Chinese economy is believed to be less.• Lending rates by commercial banks reported by the central bank may overstate the interest burden. For the past decade, industrial firms have reported an average interest expense to liability ratio of 2% to 3%.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Dec, 2008

May, 2009

Oct, 2009

Mar, 2010

Aug, 2010

Jan, 2011

Jun, 2011

Nov, 2011

Apr, 2012

Sep, 2012

Feb, 2013

Jul, 2013

Dec, 2013

May, 2014

Oct, 2014

Mar, 2015

Weighted average interest rate

Source: People's Bank of China, New America Foundation

30

The debt service burden, nonetheless, has increased significantly.• Interest payments as a share of GDP have increased from 8% in December 2008 to 12% in June 2015, with the peak at 14% in the mid 2014.• A Bank of International Settlements Study found that a debt service ratio, which includes interest and principal repayment, of 20-‐25% often precedes a financial crisis.• Without considering any principal repayment, the interest portion of the debt servicing burden is already 12%. Much of the debt, however, is rolled over.

0%

2%

4%

6%

8%

10%

12%

14%

16%

2009 2010 2011 2012 2013 2014 2015

Interest expense as a percent of GDP

Source: CEIC, Moody’s

31

To-‐date, industrial firms have had a manageable debt burden.• As of 3Q15, the ratio decreased to 2.6%, falling to the 2011 levels, because of lower interest rates.• Interest payments as a share of total liabilities in industrial firms are less than 3%.• The low rate of interest for industrial firms means that the cost of debt financing for many companies is manageable. But this has encouraged overcapacity and continued lending.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Dec, 2011

Mar, 2012

Jun, 2012

Sep, 2012

Dec, 2012

Mar, 2013

Jun, 2013

Sep, 2013

Dec, 2013

Mar, 2014

Jun, 2014

Sep, 2014

Dec, 2014

Mar, 2015

Jun, 2015

Sep, 2015

Interest expense as a share of total liabilities (industrial enterprises)

Source: National Bureau of Statistics

32

Non-‐performing loans (NPLs) have increased since 2011.• NPLs at China’s commercial banks have increased since 2011. The NPL ratio increased from 0.90% in September 2011 to 1.59% in September 2015.• Substandard loan make up 47% of total NPLs, doubtful loan account for 41%, and loss loan are 12% of the total.• But NPLs may greatly understate the number of bad loans and the overall credit problem in part because banks are slow to acknowledge problem loans.

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Mar, 2005

Sep, 2005

Mar, 2006

Sep, 2006

Mar, 2007

Sep, 2007

Mar, 2008

Sep, 2008

Mar, 2009

Sep, 2009

Mar, 2010

Sep, 2010

Mar, 2011

Sep, 2011

Mar, 2012

Sep, 2012

Mar, 2013

Sep, 2013

Mar, 2014

Sep, 2014

Mar, 2015

Sep, 2015

NPL of China's Commercial BankLoss Loan Doubtful Loan Substandard Loan

Source: China Banking Regulatory Commission, CEIC

33

Some local government debt has been restructured.• In 2015, China carried out a RMB 3.2 trillion debt swap plan for local government to refinance their high-‐interest debt.• This debt restructuring plan will help decrease local government debt repayment in the next few years.• However, with more than RMB 17 trillion total local government debt, this debt-‐to-‐bond swap plan can only help in the short term.

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Local Government Debt Issuance and Repayment

Local government debt due for repaymentLocal government bond issuance

Source: CEIC, National Audit Office, China Central Depository & Clearing Co., Ltd

34

For now, the central government has the capacity to recapitalize the banking system.• China’s central government debt is only 14.92% of GDP as of June 2015. Moreover, the People’s Bank of China has a healthy balance sheet. And despite some recent draw-‐down, China has $3.51 trillion in foreign exchange reserves as of September 2015.• China also has the ability to print money if necessary because of low inflation, excess capacity, and low oil prices.• At the same time, China has a much enlarged banking system with mounting bad debt, which at some point will become unsustainable.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan-‐06 Jul-‐07 Jan-‐09 Jul-‐10 Jan-‐12 Jul-‐13 Jan-‐15

PBoC assets (in billion RMB)

Other Asset Claims on banks Claims on Government Foreign Exchange

Source: People's Bank of China, CEIC, New America

35

A Serious but Still Manageable Debt Crisis• At its current level, China’s debt burden is manageable and does not pose a risk of an imminent financial crisis. The pace of China’s debt buildup has slowed somewhat in recent years, suggesting that government efforts to bring the credit boom under control without a major crisis has succeeded to some degree in spite the ongoing build-‐up of debt.

• For now, the central government has the resources to recapitalize the banking system. It also has the ability to print money if that becomes necessary. Nonetheless, China has a greatly enlarged banking system with mounting bad debts, which will at some point pose a much greater risk of a financial crisis.

• Even if a banking crisis is avoided, the debt build-‐up has created massive overcapacity in many sectors of the economy, and this along with the debt overhang, will be a major drag on economic growth for years to come.

36

Weiqi (Gloria) Zhang is a Graduate Research Assistant at the World Policy Institute.

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china's debt map zhang srs jf formated … ·...

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