Salient to Investors:
In Q1, China’s broadest measure of credit rose 58 percent and GDP gained 7.7 percent – each $1 in credit added the equivalent of 17 cents in GDP, down from 29 cents in 2012 and 83 cents in 2007.
The IMF said decisive policy changes are needed in China and without a refocus away from state-approved projects, it risks a further slowdown in growth and an increase in non-performing loans.
CLSA Asia-Pacific Markets said state enterprises ROE has dropped by half in 6 years, and Francis Cheung said their biggest concern is money going to companies and state-run enterprises whose performance is deteriorating.
Debt issued by the biggest Chinese companies is more than 5 times a measure of their operating earnings, twice the level in 2007.
MSCI China Index companies’ total debt over EBITDA is 5.74 times versus 2.49 times in 2007.
A Bloomberg global poll of investors expects China’s average growth rate to fall to 6-7 percent over the next 5 years, with 18 percent expecting less than 6 percent.
David Lipton at the IMF said rapid credit growth raises questions about the quality of the investment and the impact that may have on repayment capacity for companies and local governments.
Stephen Green at Standard Chartered said such stalling is extremely rare in recent macroeconomic cycles as once China’s growth starts accelerating, it usually continues. Green says the injection of credit will increase output toward the end of this quarter and next as housing, infrastructure and exports strengthen.
Michael Werner at Sanford C. Bernstein said companies may be holding some of the new credit in reserve in bank deposits to guard against any crackdown on credit channels, meaning not all of the money has been allocated yet into the economy.
Ramin Toloui at Pimco said the diminishing impact of credit on growth shows that companies are restraining investment because they recognize that the outlook for sustainable final demand is weak unless new policies boost household consumption.
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