China gets less bang for buck on its debt
As China’s economy notches up another quarter of steady growth, the pace of credit creation grows ever more frantic for every extra unit of production, as inefficient State firms swallow an increasing share of lending.
The world’s second- largest economy grew 6.7 percent in the first half of the year, unchanged from the first quarter, testament to policymakers’ determination to regulate the pace of slowdown after 25 years of breakneck expansion.
Analysts say that determination has come at the cost of a dangerous rise in debt, which is six times less effective at generating growth than a few years ago.
“The amount of debt that China has taken in the last five to seven years is unprecedented,” said Morgan Stanley’s head of emerging markets, Ruchir Sharma, at a book launch in Singapore. “No developing country in history has taken on as much debt as China has taken on on a marginal basis.”
From 2003 to 2008, when annual growth averaged more than 11 percent, it took just one yuan of extra credit to generate one yuan of GDP growth, according to Morgan Stanley calculations.
It took two for one between 2009 and 2010, when the Chinese central government embarked on a massive stimulus program with the intention to ward off the effects of the global financial crisis.
The ratio had doubled again to four for one in 2015, and this year it has taken six yuan for every yuan of growth, Morgan Stanley said, twice even the level in the US during the debt- fueled housing bubble that triggered the global financial crisis.
Total bond debt in China is up more than 50 percent in the past 18 months to 57 trillion yuan ($ 8.5 trillion), equal to around 80 percent of GDP, and new total social financing, the widest measure of credit provided by China’s central bank, rose 10.9 percent in the first half of 2016 to 9.75 trillion yuan.
China’s money supply has increased in tandem with new lending, and at 149 trillion yuan is now 73 percent higher than in the US, an economy about 60 percent larger.