Debt of China Grows at Alarming Rate

For years, the top officials of China have touted their ambitious policy priority to wean the world’s second-largest economy off high levels of debt, but there is not much to show for it.

On the contrary, an analysis shows the debt pile at Chinese firms has been climbing in that time, at the end of September it is growing at the fastest pace in four years.

China's Flag on a Compass Pointing at Debt
China's debt climbing up at alarming rate.

The build-up has continued even as policymakers roll out a series of measures to end the growing debt, including persuading state firms and local governments to prune borrowing and tighter rules and monitoring of banks’ short-term borrowing.

China listed firms showed their total debt at the end of September jumped 23 percent from a year ago, the highest pace of growth since 2013.

The analysis covered three-fifths of the country’s listed firms, but excluded financials, which have seen the brunt of government de-risking and deleveraging efforts so far.

The overall debt of China is now as much as three times the size of its economy.

According to the International Monetary Fund last year, without a comprehensive strategy to tackle the overhang, there is growing risk China will have a banking crisis or sharply slower growth.

Last month, Zhou Xiaochuan, China’s central bank governor, made global headlines with a warning of the risks of a “Minsky moment”, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.

He has also acknowledged, while pledging to fend off such risks, that it will take time to bring the debt down to more manageable levels.

The analysis revealed that the debt in the real estate sector multiplied the most over the last five years, followed by industrials.

Since the end of 2012, the share of industrials in the total debt for the companies covered went up by 3 percentage points. The real estate sector went up 7 percentage points.

As of September, state-owned enterprises reported a relatively faster pace of growth in their debt.

Highlighting the size of the problem and the drag on current and future economic growth, debt-servicing costs have bolted up about a fourth of state-owned firms' incomes in the last few quarters.

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