Explosion in Chinese SOE debt

Published Thursday 29th October 2015 09:15 HKT


Blue: Total SOE debt Yellow: Monthly increase in SOE debt Unit: 100 million yuan

Chiecon first to report in English on this $1 trillion of ‘mystery meat’, based on a direct translation from a wallstreet.cn report.

China’s state owned enterprises added almost 6 trillion yuan (around 1 trillion dollars) of debt in September, described by Luo Yunfeng, an analyst at Essence Securities, as “an unprecedented increase in leverage”. This means that not only is the government abandoning its deleverage policy, it is actually increasing leverage.

Latest Ministry of Finance data shows that by the end of September total SOE debt had reached 77.68 trillion yuan, representing a increase of 5.93 trillion yuan on August, and an increase of over 11 trillion yuan in 2015.

According to Luo “it’s possible that debt that was originally classified as government debt, has been reallocated as SOE debt”.

This might be a reflection of how the government plans to tackle its massive debt. Luo mentions that one of the obstacles to managing government debt is that it remains difficult to draw a line between government and SOE debt. The crux of of current reform plans to increase the role of market forces is aimed at resolving this issue.

If it really is the case of shifting government debt to SOEs, then it represents a step forward for this reform, and the prospect of revaluing credit risk. Another implication, it seems unlikely there will be a pause in government debt increase over the fourth quarter.

This raises the more important question of what will be the impact of this enormous debt? Over the past few years credit expansion has surpassed economic growth, and with the governments aggressive leverage, will this lead to a greater waste of resources?

In order to protect economic growth, the Chinese government has increased leverage since 2008. According to calculations by The Economist, the proportion of total debt to GDP has risen sharply, already standing at more than 240%, with total debt reaching 161 trillion yuan (25 trillion dollars). In the past four years, this debt to GDP ratio increased by nearly 50%.

The Economist points out this is a double-edged sword, as the incremental growth effects diminish with increasing leverage. Whereas in the six years prior to the financial crisis an increase in debt of 1 yuan resulted in Chinese economic output increasing by 5 yuan, these days it only results in an increase of 3 yuan.

Even if this is the case, with China experiencing slowing economic growth, and no turnaround on the horizon, its seems likely the Chinese government will continue to increase leverage. In September, China Merchants Securities stated that since Chinese government debt leverage ratio is still low, lower than the US, Europe and Japan, there is still more room for leverage.

Haitong Securities said at the start of the year that in order to prevent systemic risk the focus over the next few years will be on government leverage. Based on the experience of other countries, monetary easing almost certainly follows an increase in government leverage, with interest rates in the long term trending to zero.

 

Article later used in Zerohedge:

Nov 1st – China’s Manufacturing Misses; Nonmanufacturing Worst Since 2008 Despite Unprecedented $1 Trillion “Debt Injection”

Nov 2nd – Did Something Just Snap In China: Total SOE Debt Rises By $1 Trillion In One Month

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