China’s government sent a message last week that the country would scale back its debts, which amount to 270% of GDP. An anonymous government officials warned against the dangers of debt-driven growth by comparing it to “growing a tree in the air.”
But over the weekend it became apparent how long China’s dependence on debt will take to scale back, even with good intentions.
China released figures showing that overall credit in the country is still accelerating. While corporate and household borrowing slowed down, analysts noted local governments took out loans at a record rate, about $185 billion in April. “The pace of credit expansion remained robust in April and the real issue looking forward is whether policymakers respond by dialing back stimulus policies,” Chen Long of Gavekal Research in Beijing wrote today.
Some of the borrowing was to pay down local governments’ off-balance sheet debt, notes researcher Capital Economics, but a portion “seems intended to fund new spending” the London-based firm said.
Outstanding credit rose to a two-year high in April, according to Capital Economics’ gauge, and because the Ministry of Finance had previously required borrowing governments to allocate their funds by the first half of this year, that means credit’s likely to keep growing over the next month and a half at least, before the quarter ends.
Where’s the debt flowing? Real estate is one area. Residential sales rose by 44% in April, and construction starts and lands sales both jumped as home prices keep climbing across China’s major markets. They are climbing so fast, in fact, that local governments are trying to clamp down on speculation with new requirements such as larger down payments.
So while the news last week was dominated by stories about China’s scaling back its borrowing, a strategy enforced with an old President Xi Jinping speech running on the front page of the Communist Party’s mouthpiece newspaper, the latest credit data emphasizes that it won’t happen overnight.
That’s problematic for the country, economists have been noting recently. No major economy has grown its debt as fast or as much as China without suffering a financial crisis or long economic malaise.