A research note from Goldman Sachs highlights how large, complex and opaque China’s credit market has become over the last decade.
In a report called Mapping China’s Credit, analysts Kenneth Ho and Claire Cui write that the rise in China’s total debt started with a RMB 4 trillion ($AU770 billion) stimulus package in 2009 to counter the global financial crisis. Since late 2008, debt to GDP (excluding financial debt) has risen from 158% to 262%. Including financial debt bumps the figure up to 289%.
The rise in China’s debt to GDP follows a similar increase in America, where last week bond fund manager Bill Gross discussed the risks associated with the US debt to GDP ratio, which sits at around 350%.
The analysts note they’re struggling to break down and make sense of the country’s credit market.
“Given the development of the shadow banking sector, and the introduction of a number of retail investment channels such as wealth management products, it has become much more difﬁcult to analyse and monitor China’s credit growth,” they say.
In 2006, 85% of China’s credit was supplied by bank loans (offset by deposits). According to Ho and Cui’s estimates, the share of credit from bank loans has reduced to 53%. In its place, approximately 31% of debt is now supplied through bond and securities markets, and 16% through the shadow banking sector (more on that later).
Ho and Cui write that as China’s debt pool has grown, larger state-related companies have seen a significant increase in leverage through traditional loans from state-affiliated banks. In addition, however, a decrease in domestic interest rates has encouraged smaller companies and individual investors to shift savings away from bank deposits. The shift has spurred the creation of different asset classes and lending channels, such as funds management companies and wealth management products offered by Chinese banks. These new channels invest in traditional assets and also have exposure to shadow banking.
The Goldman report defines shadow banking loans as “any credit that are not generated from the ofﬁcial banking sector or from the securities market.” Ho and Cui estimate that China’s relatively new asset management industry had RMB 91.1 trillion under management as at June 2016. Of that, approximately RMB 32.1 trillion was invested in Non-Standard Credit Assets (NSCA).
NSCA’s “reﬂect the fact that such credits are conforming to neither bank loans nor bond market standards”, the report says. An example is corporate loans repackaged into investment products for retail and institutional investors.
The key vehicles in the rise of NSCAs are Fund Management Subsidiary Companies (FMSC) and Trusts. FMSCs were only introduced to the Chinese economy in 2012, and have less restrictions on the type of assets they invest in, “with the investment criteria dictated by individual investors”. Similarly, the type of assets Trusts can invest in is at the discretion of the Trust beneficiary.
Although traditional larger entities still account for most of the credit growth in China over the last 10 years, the Goldman researchers note that “it also reﬂects policymakers’ desire to maintain real GDP growth, and utilizing credit growth as a way to achieve that”.