Things are not looking for for China.
It seems like Beijing has averted a crisis as far as their stock markets are concerned with some heavy-handed intervention. But their corporate debt has already reached $ 16.1 trillion and is still rising.
Their corporate debt is currently at 160% of their GDP and that is twice as much as the US having deteriorated sharply in the last 5 years.
This debt mountain is going to climb an additional 77% to $ 28.8 trillion in the next 5 years.
The policy interventions in Beijing which affect corporate credit have been designed for addressing economic growth so far. But this year, it is set to reach a twenty five-year low.
Interest rates have already been cut 4 times since November 2014, bank reserves have been reduced and limits have been removed from the amount of deposits which they can lend.
Even though they want more credit to go to small companies & innovation, these measures are pretty blunt instruments.
Whenever credit is allowed to flow, the risks of the money going to problematic entities and companies is high.
Banks made an additional 1.28 trillion yuan worth of loans in June which is higher than the 900.9 billion yuan of May. Policy easing has basically focused on reducing short-term interest costs which has allowed an increase in lending as far as stock speculation is concerned. There is very little evidence that these loans are used only on profitable investments though in this economy where borrowing is still very expensive and banks don’t want to take too many risks.
The debts of manufacturers is continuing to dwarf their profits. In 2010, debts of material companies was at 2.8 times of their core profit. At the end of 2014, this figure was 5.3 times. In the case of energy companies, debt has gone up from 1.1 to 4.4 times the core profits. In industrials, the figure has risen from 2.5 to 4.2 times.
Steve Smith
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