Since the latter part of 2016, we have witnessed renewed vigour from China policymakers to tackle the problems of excess credit growth. A number of policies aimed at reining in financial sector risks were introduced, including macro prudential measures for the banking sector and regulatory guidelines targeted at shadow banking activity. The net result has been a notable slowdown in the pace of credit growth, with total debt reaching RMB 262.1tn at the end of 2017 based on our estimates, representing a year-on-year growth of 13.5%. Although this was marginally faster than nominal GDP growth of 11.2%, it represented a significant slowdown compared with previous years. Excluding financial sector debt, we estimate that total debt/GDP rose to 282% at the end of last year compared with 279% at the end of 2016. Whilst deleveraging is yet to occur, the reduced pace of leverage growth in 2017 marks a significant slowdown in China’s credit boom. That said, plenty of issues are outstanding. These include resolving “zombie” companies, removing implicit government support, and the prevention of asset price bubbles. As such, resolving the debt overhang from China’s credit boom will likely take many more years.
Tackling the debt buildup. China’s debt buildup since the global financial crisis has been one of the largest in modern history, with total debt-to-GDP rising to an estimated of 317% at the end of 2017 (or 282% if we exclude financial sector debts, compared with 158% at the end of 2008). Such rapid growth over the past decade raises questions about the sustainability of the expansion and the risks of a financial crisis. Thankfully, Chinese policymakers are well aware of such concerns and since the second half of 2016, numerous measures were introduced to contain debt growth and to rein in financial sector risks. These include the introduction of a new set of macro prudential measures for the banking sector, additional guidelines to better regulate shadow banking activities, as well as policies aimed at reducing bond market leverage and to better regulate local government financing (“No let up in China policymakers’ control on financial sector risks; implications for LGFVs“, Asia Credit Trader, Jan. 5, 2018). Given policymakers’ resolve in tackling the problems of excess credit growth, we do not expect there will be any meaningful relaxation of those policies in 2018.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
