Chinese economy could collapse if high debt loads do not decline, UBS analysts warn

UBS analysts are warning China to get their debt under control. According to research by the institution, Beijing is facing a tremendous debt issue and one that is growing each year. If left unsolved, the country’s economic growth could experience an enormous setback.

This year, the central government’s debt is equal to 15 percent of the national economy; all government debt at all levels is 55 percent of the economy and the nation as a whole, including corporations and households, is 200 percent of the nation’s GDP.

During the economic collapse in 2007 and 2008, China unleashed a massive wave of stimulus and financed an unprecedented number of construction projects. Despite the high amounts of investment, Beijing’s economic growth slowed by two percent from 10 percent to eight percent.

With this growth, experts are projecting municipal governments will fail to repay their massive debt loads. Due to this, the central government might be forced to bail out the local governments. Local media reports suggest that public officials realize the problem and are trying to get a handle on the situation.

Barclays Capital issued a report and found that China owes between 7 trillion ($1.1 trillion) and 8 trillion yuan ($1.3 trillion) to creditors, while local governments are indebted more than 20 trillion yuan ($3.25 trillion) – the National Audit Office (NAO) projected that local debt levels are half of that.

In April, Fitch Ratings and Moody’s downgraded China’s credit rating because of their debt levels. Moody’s stated in a report, “Progress has been less than anticipated in making local government contingent liabilities more transparent and reining in rapid credit growth.”

There have been some suggestions to pay down debt. One idea being put out there is for local governments to sell their own land to support state-owned businesses. It is estimated that China has trillions of dollars in assets. Also, many within China aren’t completely in panic mode yet because the economy is still growing by at least seven percent annually.

CNN is reporting that if the economy becomes sluggish and the loans begin to dwindle then the central government might hand out financial support to various state-owned financial institutions, manufacturing firms and utilities. S&P is warning, though, that this may distort the economy and destabilize long-term growth.

Private firms in the renewable energy industry in China and Hong Kong are being urged to repay their debts of more than $3.5 billion. It’s being reported that companies involved in hydro, nuclear, solar and wind have billions of dollar due next year. This has prompted many global investors to be concerned that another issuer will head into default, similar to Suntech Power Holdings.

Shares of the largest solar companies have plummeted in four of the past five years, though the shares have been jumping 36 percent so far this year due to the near-zero interest rates in the United States, Japan and Europe.

Other economic data doesn’t bode well for China. The nation’s soybean production is projected to decrease by 3.9 percent this year, which is the third consecutive year to post a decline. Meanwhile, the central government’s fiscal revenue growth has weakened and many within the Ministry of Finance are fretting about the government’s financial positions.

Furthermore, half of China’s funding to construct subways will be funded by loans from banks. Last year, the government approved projects to build or expand subways in 27 cities, with 12 of those cities slated to opening new lines this year.

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