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CHINA’S DEBT CHALLENGE: STYLIZED FACTS, DRIVERS AND POLICY IMPLICATIONS

CHINA’S DEBT CHALLENGE: STYLIZED FACTS, DRIVERS AND POLICY IMPLICATIONS This paper begins by showing that even after conditioning for factors that might justifiably lead to a country having relatively high leverage, China remains a debt outlier. In this sense, China can be regarded as over-leveraged and its debt levels may present potential risks to growth and financial stability. The corporate sector is central to China’s debt story, accounting for two-thirds of the total. Moreover, the corporate sector has been mostly responsible for China’s leverage cycles, including the leveraging up since 2008 and an earlier deleveraging phase starting in 2003. Two major but under-appreciated drivers of Chinese corporate leverage cycles are then identified. The most important is the share of internally funded corporate capital expenditure, which is a combined consequence of evolving corporate earnings and capital expenditure. The second is the rising importance of real estate and construction firms as holders of corporate debt. China’s corporate leverage landscape is also shown to be more complex than a story of zombie state-owned enterprises in industrial segments with excess capacity being ever-greened with loans from state banks. A balanced mix of policy responses will be needed to manage a warranted and orderly deleveraging cycle in the years ahead. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Singapore Economic Review World Scientific Publishing Company

CHINA’S DEBT CHALLENGE: STYLIZED FACTS, DRIVERS AND POLICY IMPLICATIONS

MA, GUONAN; LAURENCESON, JAMES
The Singapore Economic Review , Volume 64 (04): 23 – Sep 1, 2019
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Publisher
World Scientific Publishing Company
ISSN
0217-5908
eISSN
1793-6837
DOI
10.1142/S0217590817450011
Publisher site
See Article on Publisher Site

Abstract

This paper begins by showing that even after conditioning for factors that might justifiably lead to a country having relatively high leverage, China remains a debt outlier. In this sense, China can be regarded as over-leveraged and its debt levels may present potential risks to growth and financial stability. The corporate sector is central to China’s debt story, accounting for two-thirds of the total. Moreover, the corporate sector has been mostly responsible for China’s leverage cycles, including the leveraging up since 2008 and an earlier deleveraging phase starting in 2003. Two major but under-appreciated drivers of Chinese corporate leverage cycles are then identified. The most important is the share of internally funded corporate capital expenditure, which is a combined consequence of evolving corporate earnings and capital expenditure. The second is the rising importance of real estate and construction firms as holders of corporate debt. China’s corporate leverage landscape is also shown to be more complex than a story of zombie state-owned enterprises in industrial segments with excess capacity being ever-greened with loans from state banks. A balanced mix of policy responses will be needed to manage a warranted and orderly deleveraging cycle in the years ahead.

Journal

The Singapore Economic Review – World Scientific Publishing Company

Published: Sep 1, 2019

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