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Concerns over China’s US$29 trillion debt

An interesting transition is occurring within China, as the imbalance of exports to imports might be tending to swing the opposite direction. 

 

With US$29 trillion in debt, China’s potential slowdown in economic growth may be a cause for concern but some do not expect its high growth to last forever.

 

“It would be unrealistic to expect China to grow at 7%-8% forever. For an economy that is already the world’s largest in terms of purchasing power parity (PPP), and amid a spell of prolonged slow growth globally, a growth rate of 5% is still very rapid,” said Pong Teng Siew, head of research, Inter-Pacific Securities.

 

(The PPP is a popular metric to compare economic productivity and standards of living).

 

If China can’t reduce its reliance on debt, said Bloomberg, quoting an International Monetary Fund working paper, growth can slow from 6.9% achieved in the first half of the year, to 5% by 2021. Growth could fall below 3% if it goes through a financial crisis. The impact would ripple across the global economy, which last year, got about a third of its expansion from China, said Bloomberg, quoting Nomura Holdings Inc.

 

“For such a large economy that is second after the United States, its growth is expected to moderate to even below 5% in the long run. It is harder to achieve the same quantum of growth with a larger base.

 

“With or without the problem of debt, it will come to a reasonable growth rate,” said Danny Wong, CEO, Areca Capital.

 

“The shift from export-oriented growth to one that is more consumption driven, will mitigate the effects of the slowdown in growth.

 

“Many exporters here are seeing increasing export opportunities to China,” said Pong.

 

“Compared with the United States, Japan and the European Union, China is able to sustain growth with debt through internal consumption, based on the size of its population,” said Wong.

 

Overall government, household and corporate debt in China exceeds US$28.8 trillion, or 258% of gross domestic product.

 

About US$17 trillion, according to Bloomberg, is concentrated on corporate balance sheets, particularly those of state-owned enterprises, construction companies and property developers.

 

Gradual deleveraging

 

With such high levels of debt, Beijing is considered to require a “great deleveraging” process.

 

“The Chinese authorities are likely to proceed with care to prevent a sharp economic adjustment,” said Lee Heng Guie, executive director, Socio Economic Research Centre.

 

China’s banking regulator in June ordered lenders to scrutinise their exposure to four private conglomerates with US$75bil-plus in deals at home and abroad since the start of 2016: Dalian Wanda Group, Anbang Insurance Group, Fosun International Ltd and aviation and shipping giant HNA Group Co.

 

Several major Chinese banks that helped fund HNA’s global acquisitions have stopped issuing new loans to them, said Bloomberg News.

 

Authorities have asked Anbang to sell its overseas assets and repatriate the funds, people familiar with the matter tell Bloomberg News. The company says that it “at present has no plans to sell” its foreign holdings.

 

Dalian Wanda, whose founder, Wang Jianlin, is China’s second-richest man, bought Hollywood production and finance company Legendary Entertainment for US$3.5bil in 2016, said Bloomberg.

 

Anbang bought the Waldorf Astoria while Fosun purchased Club Méditerranée SA and Cirque du Soleil.

 

“The move towards a more restrictive stance on outward investment by Chinese companies, especially for non-strategic investments, will likely weigh on investments into the region.

 

“However, the Chinese government is unlikely to put on hold the One Belt, One Road initiative as the projects are infrastructure-related and long term in nature,” said Lee.

 

The combined impact of China’s deleveraging process and slowing economic growth are likely to have a negative spillover effect on regional economies via trade and financial channels, added Lee.

 

 

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