Rising overall credit in China.
Moody's Investors Service
By Scott Cendrowski
January 27, 2016

China’s economy is meeting its 7% economic growth target thanks to rising debt, credit rating agency Moody’s said Wednesday as it joined the chorus of skeptics about the world’s second-largest economy.

“Policy support in the pursuit of growth targets is likely to persist in 2016, postponing deleveraging and the eradication of excess capacity,” Moody’s said. “Such a delay would be credit negative.”

Conversation about China’s economy has shifted towards debt recently, in part because the country’s massive 2008-09 fiscal stimulus is over, and yet overall credit keeps rising quarter after quarter.

A chart of overall credit since 2002 looks like a bumpy road, followed by a roller coaster rising without end starting in 2009.

Rising overall credit in China.

Rising overall credit in China.Moody’s Investors Service

China’s economic outlook is dizzying and complicated. But the clearest long-term point is this: there is too much wasteful debt in the system and now it is being used to prop up state-owned businesses and real estate projects that should otherwise falter. “Like, Japan, South Korea and Taiwan before it, China was always going to end up with a debt problem, which is hard-wired into its capital-intensive model of industrialization,” Gavekal Dragonomics analyst Joyce Poon wrote last year.

Even skeptics point out China can avoid a crash by rebalancing its economy toward consumption, bringing down the growth rate, and halting credit growth. But for now, the government is stubbornly keeping the economic growth rate high, and using debt to meet it.

“Overall credit growth (described officially as Total Social Financing) continues to grow faster than nominal GDP, and has even accelerated, leading to rising leverage,” Moody’s says. TSF is a metric invented by Beijing that captures lending to non-state entities like private companies and people, but excludes central and local government borrowing.

Its rise captures the point that overall credit is growing much faster than GDP, which means China isn’t yet fixing its debt problem. Economists studying China including Peking University professor Michael Pettis say there is no magic number at which debt is too large a percentage of GDP. But many believe China, on its current trajectory, will hit it. And the longer it lets the problem of excess debt fester, the more dramatic the fallout may be.

 

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