China: Ludicrous borrowing data - Rabobank

Michael Every, Senior Asia-Pacific Strategist at Rabobank, points out that Chinese borrowing data yesterday were once again ludicrous and even though there was a sign of deleveraging in shadow banking --which will carry its own risks-- but this was more than compensated for by a surge in traditional bank loans and in local government borrowing.

Key Quotes

“Indeed, local governments issued CNY845bn of debt in July alone, equal to USD126bn, or an annualized USD1,508bn. In other words, around 1.1% of China’s vast GDP was borrowed by one sector of the economy in one month. And despite that, M2 growth still slowed to a record low of 9.2% y-o-y. Worried yet? If not read on. The latest IMF report also estimates that including central government, local government, Government Guided Funds (which are part on- and part-off budget expenditure for infrastructure), and Special Construction Funds (which do the same and are lent from state-owned policy banks), China’s fiscal deficit was already 12.4% of GDP in 2016: given the latest set of data, we might be heading over 14% this year! And all this when GDP growth is still around the magic 7% level: what kind of fiscal madness might have to be unleashed if/when we see an inevitable downturn?” 

“Of course, as the IMF stress, this is sustainable given low inflation --because all the spending is on supply, not demand, even if that creates huge global problems that are coming home to roost-- and because China still runs a current account surplus, and because it has draconian (but leaky) capital controls. However, if any of those were to change, things would look very nasty, very fast; a potential trade war ahead (or real war, heaven forbid: Reuters reports today ‘India, China soldiers involved in border altercation: Indian sources’) would also raise risks; but increasingly poisonous debt dynamics are going to work their way through the Chinese system over time regardless.”