China: A Tsunami of Non-Bank Lending Is a Growth Killer

A lot of vague mention is made to the rising levels of debt in China, but where exactly is this debt being accumulated and is it a cataclysmic problem of Argentinean or Asian debt crisis proportions?

Well, first and foremost the debt is being accumulated by just about every part of the economy as these series of graphs produced by the FT so graphically illustrate. Funds have been lent in the form of both fairly visible bank loans and less visible trust loans, etc. But, as this graph shows, the huge growth since 2007 has come from non-bank sources:

The graph also illustrates how lending has ballooned since 2007. What spurred a tsunami of lending?

Faced with a sharp slowdown in the global economy, Beijing unleashed a tsunami of lending for everything from state investment in infrastructure to corporate investment in manufacturing, housing construction and speculation. Total debt owed by Chinese households, companies and governments soared from 130% of GDP in 2008 to almost 200% today. The economy has become ever more reliant on debt to fuel growth.

Inevitably, a significant proportion of this has been wasted or will go sour. Corporate debt as a percentage of total equity in China is by far the largest of any emerging market, jumping from 71.8% in 2007 to 104.6% in 2012, but that is only part of the story: total debt is nearly 200% as this graph below shows.

Meanwhile, growth is slowing and the ability to fund debt costs by ever-higher growth is weakening.

What are the reasons behind the relationship between China’s economic growth and debt levels?

To be continued later this morning in Part Two.