China ‘sweet spot’

The words, ‘sweet spot’ in this FT news-story on China’s ‘improved’ economic conditions caught my eye. The phrase is attributed to the China economist at Macquarie Securities. ‘Sweet spot’ indeed. China has revived its property bubble it never really deflated. Look at the real details:

Caixin, which took over sponsorship of the PMI survey from HSBC last year, noted on Wednesday that property was “the main factor driving the recent rebound in investment”. [Link]

Chinese companies are cancelling debt offerings. Either no one is willing to lend to them or that they are up to their necks in pre-existing debt:

Chinese companies canceled more than double the amount of bond offerings in March compared with a year earlier, as mounting defaults increased financing costs.

At least 62 Chinese firms postponed or scrapped 44.8 billion yuan ($7 billion) of planned note sales last month, compared with 23 companies with 15.7 billion yuan a year ago, according to data compiled by Bloomberg.

China has abandoned any pretence of rebalancing (how many times do we have to restate the obvious?) and has re-ignited a property bubble through renewed lending. [Link]

That is some ‘sweet-spot’ indeed. Yet, debt is surging. It seems that some are borrowing merrily. May be, now it is the turn of real estate developers and construction firms.

Check out the Bloomberg article on the never-ending debt surge in China. The article has useful charts.

Nonetheless, it baffles me as to why analysts and journalists are not making better use of the systematic quarterly compilation of non-financial private and corporate sector debt (amounts and ratios) now compiled by the Bank for International Settlements. On that basis, China’s non-financial private sector debt is 205.2% of GDP (as of Q3, 2015) and the general government debt is 43.5% of GDP. So, as per this count, China’s debt/GDP ratio is 248.7% of GDP. This ratio was 234.2% in Dec. 2014 and 220% in Dec. 2013.  This is rebalancing and restructuring with Chinese characteristics.

We are not sure if the general government debt includes debt owed by local government financing vehicles. Surely, the ratio cannot account for loans taken from ‘shadow banking’ vehicles. By definition, they would be outside the accounting framework.

To understand the real sweet spot that China’s economy is in, readers should check out this presentation by the Royal Bank of Scotland, prepared in February 2016.

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