During the XNUMXth Communist Party Congress held last October, President Xi Jinping consolidated his leadership by focusing on growth prospects and the potential for reform of the economy and the financial system.
However, Zhou Xiaochuan, governor of the People's Bank of China, appeared to have a different opinion, sending alarm signals about the high debt. The two leaders' differing emphasis on the state of the Chinese economy is causing some concern among investors, as evidenced by the small correction in the Chinese stock market in recent days.
First of all, it must be said that the particular nature of the Chinese economy – where the government controls many private companies, the so-called SOE (State-owned Enterprises) – makes it difficult to classify debt which, therefore, makes more sense to consider at an aggregate level. The cumulative data of government, corporate and household debt reached 274% of GDP in June of this year, starting from 150% in 2008. These are official data, which do not include "shadow banking", i.e. loans "shadow" between individuals.
The current level of Chinese debt is comparable to that experienced in advanced economies, such as the United States or Europe. But an emerging economy would need to stay on a lower footing, both because it has less established market access and to maintain leeway to finance new infrastructure and growth projects or deal with setbacks. Furthermore, the speed with which debt has grown is worrying.
This year, China accounted for a quarter of global economic growth and remained the number one consumer of raw materials. Zhou Xiaochuan's alarm therefore does not concern only his country: what is happening in China has implications on a global scale and is destined to influence international markets.
Thankfully, the threat of China's debt is probably not imminent. The economy continues to make good progress (6,8% growth in September) while the state and the central bank jointly exercise a strong control over capital flows. A series of reforms have been initiated to modernize the economy and to make state-controlled companies more profitable. In particular, the Chinese institutions seem to understand that the next phase of growth will necessarily have to be guided by consumption and services and therefore requires a change in the economic model that has known so far so successful.
Also, much like Japan or Italy, much of the debt is internal to the economy. In fact, the strong propensity to save of Chinese households causes banks to have an abundance of liquidity, which is used on the domestic market. External debt is therefore limited to 13%, which greatly reduces the chances of a short-term shock.
Overall, we expect the government's economic policies to lead to a controlled deceleration of the economy (from 6,9% this year to 6,4% in 2018), while the growth rate of bank loans is expected to fall to 13% to keep excesses under control without having repercussions for the production system, at least immediately. China's debt needs to be monitored closely, but should remain manageable in the short term; we therefore maintain an overweight position in global equities.
