This aerial photo taken on March 29, 2016 shows a view of the free trade zone in Shanghai, east China. China's GDP stood at 15.9 trillion RMB yuan (2.4 trillion U.S. dollars) in the first quarter this year, growing up by 6.7 percent year on year, the National Bureau of Statistics said on April 15, 2016. (Xinhua/Ding Ting)
Concerns about China's debt levels reaching a critical threshold and posing a systemic risk are overblown and the country's high debt-to-GDP ratio must be put into perspective, according to a report by an investment bank.
Outstanding loans extended by China's financial institutions amounted to 98.56 trillion yuan (15.21 trillion U.S. dollars) by the end of March, up 14.7 percent year on year, according to data from the People's Bank of China (PBOC) on Wednesday.
Some argue that China's debt-to-GDP ratio has already reached a point that could lead to systemic risk and derail growth, but we disagree, said Qu Hongbin, chief China economist with HSBC, in a report on Thursday, adding that simply comparing China's debt-to-GDP ratio with other countries was misleading.
China's debt-to-GDP ratio is indeed high, and is reported to reach about 250 percent at the end of 2015. Yet this must be seen in the context of China's unusually high savings rate, which has stayed above 40 percent for two decades, Qu pointed out.
HSBC's regression analysis, which uses debt data from the Bank for International Settlements, suggests that every 1 percentage point increase in the national saving rate implies a 3.6 percentage points rise in the debt level. From this perspective, China's debt levels are consistent with its high saving rate.
Another factor is a financial structure dominated by banks, which means the household sector's surplus savings have been transferred into corporate investment through bank lending rather than equity financing, leading to faster debt accumulation. Equity financing accounted for less than 5 percent of total financing in the economy in the last decade, according to the report.
Economic data in Q1 showed that policy easing is still effective, efficient and necessary. Some worry that stimulus will allow Beijing to abandon reform, but recent data suggests that most of the easing has gone to support infrastructure investment and mortgage lending instead of adding to overcapacity, the report said.
Outstanding loans extended to small businesses rose by 14.5 percent year on year to 18.75 trillion yuan by the end of March, up 0.6 percentage points from the end of 2015, according to PBOC data.
"We believe reform and reflation are not contradictory. In fact, as policy easing can help contain the risks of a 'debt deflation trap,' it can help facilitate the reform agenda by making it easier to reallocate labor and capital resources in the restructuring process," the report added.
