Have you heard the one about the priest, the rabbi and China’s deleveraging? We forget how it goes, but it’s pretty damn funny, especially the last part after a Reuters report that following China’s repeated vows by Beijing it would reduce the country’s unprecedented sovereign, municipal, corporate and household leverage, China’s debt is not only rising, but growing at the fastest pace in four years.
It’s especially funny because for years China’s top officials have – well – lied, touting 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, the debt pile at Chinese firms has been climbing in that time, with levels at the end of September growing at the fastest pace in four years.
As shown in the chart below, a Reuters analysis of 2,146 China listed firms showed their total debt at the end of September jumped 23% 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 analysis revealed that debt in the real estate sector increased the most over last five years, followed by industrials, with the share of industrials in China’s total corporate debtload going up by 3% psince the end of 2012, while relative real estate debt rose by 7%.
In September, as shown here before, state-owned enterprises also reported a much faster pace of growth in their debt, as the government quietly backstopped quasi-private companies. In addition, last month we reported that as part of China’s latest bailout of the financial sysmte, Beijing was set to buy 24% of all residential real estate offered for sale in 2017. Both mean debt would surge, and sure enough, total debt at 75 of the CSI Central SOE 100 index companies increased by more than 27 percent from a year ago, the biggest increase in many years.
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However, in addition to rising debt, there is another, even more pressing risk: rising rates. According to Reuters, debt servicing costs – i.e., interest expense – now accounts for a fourth of state-owned firms’ revenues in the last few quarters. The ratio rose to around 27% in the second quarter – the highest in at least five years – before declining slightly to 24.47% in the third quarter due to a jump in revenues. Needless to say, with China’s 10Y government bond yield and corporate spreads blowing out to 3 year wides, traders will be especially focused on what happens to Chinese interest expense in the coming months.
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There is some good news: an analysis of corporate debt showed that borrowing through the issue of bonds has fallen, however, possibly as the regulatory clampdown has pushed up financing costs. Additionally, as noted last week, October’s data on aggregate social financing of corporate bonds showed aggregate financing of corporate bonds stood at 18.34 trillion yuan ($2.77 trillion) at the end of October after increasing 4.4% from a year ago, the lowest growth rate in two years.
China Broad Credit Growth (TSF + Local Government Bond Issuance)
Who plugged the gap? Ah yes, the infamous shadow banking sector. Per Reuters:
The gap in funding needs appeared to have been filled by off-balance sheet financing in China’s murky and opaque shadow banking sector. Cumulative total social financing, which also includes shadow banking, stood at 172.2 trillion yuan at the end of October, though the exact size of shadow banking is unknown. Total social financing for the month of October 2017 was 1.04 trillion yuan.
Then again, as some have suggested, perhaps China was just waiting for last month’s comunist congress to pass before finally committing itself to this much hyped deleveraging. As Reuters reports, China’s deleveraging push indeed appears to have intensified after the 19th Communist Party Congress in late October. In its latest salvo on the shadow banking sector, (described in in “A “New Era” In Chinese Regulation Means Turmoil For $15 Trillion In China’s “Shadows”) the central bank on Nov. 17 issued sweeping guidelines to tighten rules on asset management business, which the central bank estimates is a $9 trillion market. Just a few days later, fears of the deleveraging push resulted in the biggest Chinese stock market crash in 17 months.
And while China’s government debt remains optically contained, at 46.9% of GDP as per latest figures from the Bank for International Settlements, top policymakers have recently raised concerns about a sharp build-up in household debt. Outstanding household consumer debt surged close to 30% since the middle of last year and reached 30.2 trillion yuan as of October. Meanwhile, outstanding yuan-denominated property loans amount to 31.1 trillion yuan and individual mortgage loans add another 21.1 trillion yuan as of the third quarter of 2017.
There are two parting questions one should consider: the first is whether China has any hope of ever deleveraging without unleashing a depression. With total debt/GDP at 329% as of May 2017 according to the Mercator Institute, we doubt it.
The second is linked to the first: with China contributing an unprecedented 33% of global debt growth in the past decade, any slowdown in debt creation is sure to send an economic shockwave across the globe.
And one bonus question: when the IMF published the following chart in its latest Financial Stability Report, how long did it say China has left before it implodes?