Loading ...China’s debt is a staggering $24 trillion with 247% of annual GDP as of last year, which is, in fact, an increase of an astounding 465% within a decade. The total borrowing by both the financial and non-financial sectors was only 78% of the GDP in 2007 and has since increased to 309% of GDP according to economists at Nomura Holdings Inc. led by Yang Zhao and Wendy Chen.
Some naysayers believe that the leverage in China is still far below that of what the U.S. was in 2007 previous to the financial crisis. However, they neglect to note that the property sector has increased by 4.5 times between 2000 and 2015 within the top-tier cities. Experience suggests that such a rise is both unsustainable and “bubbly.” A sharp drop in the property prices will increase the leverage to astounding levels, thereby threatening their economy.
Huge Fiscal Deficit Challenge
The IMF has forecasted that China will have a moderate budget deficit of 3%, which sounds very comfortable. The IMF has merely considered the government’s debt so as to arrive at said figure, which accounts for less than 20% of public spending. The local governments and municipalities in China account for over 80% of public spending.
When the total figures are considered, this balloons to 10% according to the IMF, whereas, Goldman Sachs believes that number is much higher – above 15%. These numbers are far worse than those in the United States directly before the financial crisis of 2008.
Most state-owned companies are taking on more debt in order to pay off their earlier debt. Bad loans soar, as shown in the chart below. The government has not allowed any major firms to become bankrupt in order to keep their job numbers propped up. If they start to let companies fail, unemployment numbers could skyrocket!