Monday, 9 May 2016

China's debt may not be so bad but could lead to 'lost decade'

How big is China's debt problem? While many view it with concern, some are more sanguine.

Mark Tinker, head of Axa Investment Manager's Framlington Asian equities business, said that despite having an alarmingly high debt-to-GDP ratio of more than 250 per cent, China is not about to trigger an emerging market crisis.

According to Tinker, most of the debt load is domestic, meaning little foreign currency exposure. Also, much of it comprises short-term bank loans to special-purpose vehicles set up to fund local government infrastructure that can ultimately be repackaged as long-term bonds and sold, via banks, to institutional investors.

Investment bank Macquarie apparently has similar views. Valentin Schmid at Epoch Times wrote that according to Macquarie, “debt under state capitalism is different from that in market economy”. In China, the government owns most of the banking system and can tell banks to roll over debt indefinitely.

The real concern, rather, is that doing so in an “environment of slow growth amid collapsing productivity ... could instead lead to the scenario of Japan’s ‘lost decade’”.

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