Let us count them… or at least, begin to.
The People’s Bank of China in February acknowledged that official credit financing figures weren’t adequately capturing non-bank lending, so they began to publish broader figures under the moniker “total social financing” (aka “society-wide financing”). Under this measure, Chinese financing levels for 2011 would be about Rmb14,000bn – similar to the previous two, stimulus-infused, years – despite the various efforts at credit tightening this year.
The problem is that this TSF/SWF figure still excludes many other forms of financing, according to analysts at Fitch. So they came up with their own measure, “adjusted total social financing”. The bulk of the extra finance they counted came from letters of credit, credit from trust companies (only one subset of which is counted in official figures), lending by other domestic non-bank financial institutions, and loans from Hong Kong banks.
Totting up these forms of finance, this is what they got:
By this measure, total financing on the mainland is expected to exceed CNY18trn in 2011 — roughly CNY1.5trn greater than in 2010 (Figure 5) — or more than 38% of estimated 2011 GDP. This is down from an average of 42% of GDP in 2009‐2010, but still well above the pre‐global crisis average of 22%.
Moreover, it shows the rapid growth of non-bank lending:
Perhaps most strikingly, more than 55% of new financing is expected to come from outside bank lending, close to triple the level of 2006. This underscores just how rapidly off‐balance‐sheet and non‐bank financing has been expanding in China. Given the rapidity of recent growth, Fitch considers it imperative that these channels be incorporated into assessments of macroeconomic and financial sector developments. Doing this requires reliable data, which can be challenging to come by in China, particularly for new areas of activity. It is for this reason that the agency has created this framework.
It gets even more interesting when the total debt to GDP ratio is counted. Fitch estimates that, by the end of 2011, financing could be equal to 185 per cent of GDP. And, they note, the rapid growth of this ratio is similar to that which preceded financial crises in many other countries:
China expert Michael Pettis, who says the country’s debt levels could become unsustainable, points out that combining Fitch’s adjusted TSF with other broader estimates of Chinese financing, and you get a potentially much bigger multiple of GDP. Victor Shih of Northwestern University is one such example of a broader estimate.
Victor Shih’s description, as paraphrased by Global Post, of what happens when state-owned enterprises’ debt is included:
That depends on what you include. Large sectors of the Chinese economy are owned by the government. The debt of these state-owned enterprises is what’s called a “contingent liability” — ultimately it’s the responsibility of the government. If you count all of these liabilities, then you get to an extremely high number, something like 150 percent of the Chinese gross domestic product, or more.
A more restricted definition is debt that’s owed by either the central or local governments. That is about 80 percent of China’s GDP.
Shih does go on to point out that this doesn’t necessarily become a crisis when growth is strong. The question is, will China’s growth be strong enough? And the bigger question, which Pettis refers in our Alphachat podcast, is that much of this debt is part of a tremendous imbalance in China – because it is being used to find investments that are no longer economic, and because the cost is born by household sector – perpetuating what Pettis describes as China’s extremely low proportion of household spending to GDP. Which, combined with inflation, could be storing up bigger problems.
Related links:
China’s new, wider financing measure – FT Alphaville
If (when) China slows down – FT Alphaville
China’s stagflation question – FT Alphaville
Introducing Alphachat, the FT Alphaville podcast – FT Alphaville