LONDON — It is not news that Chinese debt is regarded as a risk to global financial stability.
But it is news that the situation is so bad that even Chinese bank executives are willing to say they’re in a bubble.
It’s a “bubble,” according to Lai Xiaomin, chairman of China Huarong Asset Management, China’s largest state-controlled “bad bank.”
Huarong trades in non-performing loans, distressed assets and bad debt. Investors are so sure that the government has got the debt situation under control that people are pouring money into risky debt products rather than fleeing from them, he says.
“There is a bubble in the price of bad assets,” he told the Financial Times. “If you don’t understand the market for bad assets or asset restructuring and merging, for non-professionals there is big risk. Not only will you not make money, you will also lose money.”
There has been an uptick in the number of voices openly worrying that the country’s debt is out of control. One of them — Charlene Chu — now says Chinese debt is so large its scale is becoming almost unimaginable. Chu, a former Fitch analyst now at Autonomous Research, told the Financial Times recently:
“Everyone knows there’s a credit problem in China, but I find that people often forget about the scale. It’s important in global terms … it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”
A source close to Bank of England Governor Mark Carney told the Financial Times, “It is the biggest risk to financial stability.” The BOE’s official position isn’t much different. China’s “underlying vulnerabilities remain pronounced,” the bank wrote in its recent review of financial system instability.
The stats are easy to cite: Total debt is now nearly 300% of Chinese GDP. The China banking sector is about three times the size of its economy. Credit growth in China is now so large that the margin of error for estimates of its size now falls into the trillions. Chinese corporate debt is currently about US $US18 trillion, or 170% of GDP.
Debt in China is recycled into a complex, opaque system of interbank loans and “securitized investment vehicles,” or packages of risky loans structured like a bundle of mortgages in the form of a bond. That makes it difficult to see how much of the debt is worth investing in, or how much is bad enough to implode.
Some people expect a Lehman Brothers’ style collapse. That could hobble the Chinese economy, with severe negative effects for the rest of the world economy — China’s economy is now bigger than that of the US.
The solution may create more of the problem, the BOE says: “The Chinese authorities have tightened bank regulation in order to reduce leverage in the financial sector. This will push up market rates further, making it more difficult for borrowers to service their debts.”