China’s corporate debt is getting out of control

(July 19, 2015 - by Sam Catherman, The State Column)

A new survey has shown that Chinese corporate debt is reaching unprecedented levels, at a time when economic growth is at a 25-year low.

Beijing has been in dire straits the past few weeks, narrowly averting a crisis in its stock markets by using heavy-handed intervention. According to a recent report from Reuters, the world’s largest corporate debt pile, nearly $16.1 trillion and rising, poses a serious threat to China’s slowing economy.

China’s corporate debts are currently at 160 percent of their GDP, a level that is twice that of the United States. Corporate debt is projected to shoot up 77 percent to $28.8 trillion over the next five years, according to estimates from credit rating agency Standard & Poor’s.

Up until this point, most of Beijing’s economic policy interventions have been geared towards supporting growth, which is projected to reach a 25-year low this year. The government has slashed interest rates four times since November, and his also reduced the reserve requirement for banks and removed lending limits – a recipe for debt disaster.

Although China wants more credit going to smaller, innovative companies, these measures don’t really paint a complete picture when thinking about the economy as a whole. According to Louis Kujs, RBS chief economist for Greater China, “When the credit taps are opened, risks rise that the money is going to ‘problematic’ companies or entities.”

China’s banks issued 1.28 trillion yuan in new loans this June, which amounts to nearly $206 billion. Standard and Poor’s says that the rapid growth of debt in China, the opacity of risk and pricing, and the very high debt-to-GDP ratio are a hazardous combination.

China has been notorious for breaking conceptions about economic growth, and it appears that they will be faced with the task of reigning that growth in soon.