4 Reasons Why China Can Overcome its Debt Uncertainty

China has considerable control of its domestic economy and can stabilise debt. Mention investing in China and the conversation usually turns to its build-up of debt. This might put off investors unaware of the bigger picture.

Context is key. Although China’s debt stands at over 250 percent of its gross domestic product (GDP) as at the end of 2016ⁱ, there are no signs of an imminent crisis even as we remain cognisant of the risks. Not only does the Chinese government have the means to keep its debt under control, there are also reassuring signs of sustained growth in the economy.

Below are four reasons why we expect China’s debt situation to improve:

1.Savings Shore Up Lenders’ Capacities

In 2016, China’s national savings rate of 46 percent of GDP was head and shoulders above the world average of 25 percentⁱⁱ. The nation’s labour force of more than 800 millionⁱⁱⁱ should continue to support the savings base.

Fig1: China's industrial profits^v

2. Capital Controls Lead to Economic Benefits

China’s central bank has imposed strict rules that limit the flow of capital out of the country. These rules, which also aim to direct investments to certain sectors domestically, could help local enterprises grow faster and improve their output for every yuan borrowed.

Cumulatively, China’s capital controls are likely to result in a more sustainable debt environment.

3. Internal Debt is More Easily Managed

The majority of Chinese debt is internal, which is easier to manage than external debt. The low proportion of external debt means that changes and shocks coming from foreign markets, such as Europe and the US, are unlikely to destabilise the debt situation in China.

4. The Stabilising Role of the Chinese Government

As the major stakeholder of domestic banks and state-owned enterprises (SOEs), the Chinese government assumes the dual role of lender and borrower.

Given that the majority of Chinese debt is internal, this dual-role position puts authorities in a strong position to rein debt in. The Chinese government has expressed clear intentions to curtail further lending as part of the reform of SOEs^IV. If concrete actions are balanced by measures to boost productivity and sustain overall economic growth, the future continues to look bright for China.

To gain deeper insight into investment opportunities and challenges in China, read our investment insight “China’s Debt Mountain”.

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Footnotes

Source: ⁱhttps://data.worldbank.org/indicator/FM.AST.DOMS.CN?locations=CN
ⁱⁱAug 2017, International Monetary Fund, People’s Republic of China: Selected Issuesⁱⁱⁱhttps://data.worldbank.org/indicator/SL.TLF.TOTL.IN?locations=CN
^ivhttps://www.bloomberg.com/news/articles/2017-07-20/xi-jinping-turns-china-deleveraging-cross-hairs-to-fresh-targets
^vNational Bureau of Statistics and Bloomberg, May 2017.

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4 Reasons Why China Can Overcome its Debt Uncertainty

1.Savings Shore Up Lenders’ Capacities

2. Capital Controls Lead to Economic Benefits

3. Internal Debt is More Easily Managed

4. The Stabilising Role of the Chinese Government

Footnotes

Disclaimer