Debt overhang

China’s rebalancing is being complicated by a heavy debt load, under which many local players are struggling. The People’s Republic’s credit growth has been around double that of nominal gross domestic product since 2007, meaning that the debt-GDP ratio has risen by around 120 percentage points. “We estimate the ‘excess’ credit growth above a sustainable trend probably amounts to 35-40 percentage points”, says Hugman. As much of this debt is domestically issued, Beijing’s challenge is to sustain nominal growth while stabilising debt levels. Hugman says the government can do this in two ways. “It can either materially lower the cost of servicing debt through further monetary easing, financial sector reform and maturity extension of lending,” he says, or by “creating frameworks for writing down debt related to excess capacity through industry consolidation or debt re-profiling.” 

Over the next two-to-three years, we would expect to see debt as a percentage of GDP stabilise if Beijing is successful, if not it may have a fundamental effect on economic growth.