Salient to Investors:
50% of surveyed economists say non-performing local-government and corporate debt will significantly impact China’s credit and economic growth, and expect China to deal with bad loans at local governments in the next 18 months by expanding the muni-bond market and letting localities refinance with direct bond sales.
JPMorgan Chase says avoiding a growth collapse like Japan in the 1990s hinges on China’s ability to reduce debt and shift policy. JPM says China’s credit-to-GDP ratio rose to 187 percent in 2012 from 105 percent in 2000, versus Japan’s rise to 176 percent in 1990 from 127 percent in 1980: while mitigating factors like the increase in debt being mainly held by domestic investors and a national savings rate of more than 50 percent of GDP also existed in Japan in the late 1980s.
Yao Wei at Societe Generale said China’s debt ratio is absolutely dangerous and sees a high risk it will have significant downside pressure on Chinese growth in the next few years.
Goldman Sachs said China’s debt-to-GDP ratio has increased by 56 percent in the 5 years through 2012, versus an advance of 66 percent in Thailand and 40 percent in Malaysia in the 5 years before the Asian crisis of 1997-98.
Nomura said earlier in 2013 that the increase in debt in China of 34 percent in the 5 years through 2012 shows increasing risks of a financial crisis because debt in Japan, Europe, and the US increased by 30 percent of GDP in the 5 years before crises – the “5-30” rule.
Murtaza Syed at the IMF said China’s debt per capita GDP is one of the highest in the world, but comparisons with Japan are misplaced because Japan also had property and stock bubbles that burst. Syed said China is still at a relatively early stage of its development, and with the right reforms can enjoy many years of still relatively strong growth.
Hu Yifan at Haitong Intl Securities said Detroit’s bankruptcy filing sounded alarms for many local Chinese governments, but said the situation is not as scary if you consider the size of state-owned assets of 100 trillion yuan, or almost double GDP.
Ding Shuang at Citigroup said China’s problems won’t be resolved easily because they have never had them of this scale and sophistication.
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