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2) Non-Performance Bank Loans
Reuter claimed that China's debt has risen dramatically largely due to the credits offered to the state-owned enterprises. It claimed that this debt has threatened China's stability, slowing down the economy and the stock market growth. However, many are not convinced. They argued that such fear is overdone. Let's examine what the statistics and charts are telling us.
How much are the Debts?
Reuter explained this debt level is not too high when compared to Japan's 370%. However, the rate of rising has fastened; otherwise, China's debt appears to be normal & manageable.
But Reuter went on to say that was not the case for the Domestic or Corporate Debt. The debts without counting the Government's debts have gone way above the rest of the countries. This is particularly obvious as shown in this chart.
The chart is showing that China Domestic credit is mimicking the path of Japan about 20 years ago, during which time, Japan was embarking on its journey to the "lost decade".
As China's GDP in 2020 is about USD14.7 Trillion; hence, for the 182% GDP debt, each Chinese of 1.3B people owed the Chinese banks about USD20,000
What about Hong Kong & Macao?
If the Domestic debts in Hong Kong and Macao are low, it might help China to balance out the Corporate Debt; but the debt situation in Hong Kong and Macao is even worst as shown in the following chart.
Source: World Bank
The following is the bar chart showing China and its SAR regions' Domestic debts by Banks against other countries or areas. China's Domestic debts by Banks are about 40% higher than the UK and 60% more than Japan. The SAR's debts are much higher.
Source: World Bank
What do the Stock Markets say?
Presently, the 3 big stock exchanges are showing mixed results. Shanghai Composite (SSEC) is trading around the upper trend line of a symmetrical triangle according to the weekly chart as shown below. Hong Kong HSI has just broken down the lower trendline and Shenzhen is seen climbing up the lower trendline.
The Technical Analysts will usually say the trend of the market will be bullish if the index can break above the symmetrical triangle or vis-visa. This is exactly what the monthly SSEC index is about to do and Shenzhen has done recently. But there was no appreciable volume supporting the two break up movements; meaning, the stock rising of the index was weak and the index might reverse its course at some future time. As for Hong Kong HSI index, it has a false break up earlier. It is now heading downwards after breaking the lower trendline.
Overall, we are expecting SSEC and Shenzhen indexes to continue moving up to test the resistances, failing which, we will expect these 2 indexes to move downwards. As for HSI, we are expecting it to make a move to retest the lower trendline that it has just broken.
Conclusion
China, as a country, might have manageable National Debt but one cannot say the same for the Domestic or Corporate Debts which is now the highest in the World. It would be a concern to investors to watch out as some very big private property developers have defaulted their interest payments recently. Any action by China's banks to limit their risk on the loans given to the private sectors would have serious repercussions for the stock markets, not only in China but also all over the World.
Disclaimer: This article is for information and educational purposes. Readers are advised to conduct their own research and study to make their own investment decisions.
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Update: Realtime World Bank Charts
Domestic credit to the private sector by banks (% of GDP) - China, United States, Japan, Euro area
Domestic credit to the private sector by banks (% of GDP) - China, United States, Japan, Hong Kong SAR, China, Macao SAR, China
Update: Non-Performing Loan (NPL)
The NPL of the banks will affect the country's economy. When a country ignores its NPL problem, its economic performance will suffer.
The banks' NPL is an indicator of a debtor’s inability (or unwillingness) to pay the bank. A high NPL will become a burden for both the banks and the borrowers. It traps valuable collaterals. Any unresolved debts will make it more difficult for debtors to obtain new funding for their investments. The banks on the other hand will have to bear the cost of NPL Its balance sheets and profitability will be greatly affected. Allow NPL to be unchecked, it will affect the country's economy.
Italy faced economic problems when its NPL ratio reached 17% in 2018. Greece almost went bankrupt when its NPL ratio hit 46% in 2017. Across the European Union, NPL ratios have doubled between 2009 and the end of 2014.
China's present NPL ratio is around 2%. This is a very healthy figure. But, many property developers are presently heavily in debt. Today, they manage to stay above water; tomorrow, some are expected to go bankrupt.
Presently, real estate development in China contributes about 14-15 per cent of China's GDP. If construction and other related industries are included and accounted for, the contribution could exceed 25 per cent of GDP.
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Update: 1 May 2022 : 70% of Households are in Debt
In China, about 70% of households are taking up bank loans to buy housing and apartments. Of late, housing prices in China have dropped drastically, Newly built houses today cost only about 1/3 of the price about a year ago. Going forward, it is likely to see the Chinese Government trying to save the housing market & the banks that loan the money. One would expect the Chinese stock markets to fall again soon.
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Update: 1 July 2022 : Debts incurred since
Xi took office
China's domestic debts were 134% of GDP (9.57 Trillion USD) when Xi took office in 2013 as Chairman of CCP. The debts ballooned to 185% of GDP (14.72 Trillion USD) after 7 years in 2020. So the increase in domestic debts in China was around 14.43 Trillion USD (14.72*185% - 9.57*134%) since Xi took office in 2013. This roughly works out to a debt increase of around 2.0 Trillion USD per year or 166 Billion USD per month.
The following will show one of place where the debt money could be coming from.
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Update: 5 July 2022: Where will China be Heading?
Debt is just like the opium; once addicted, the habit is very difficult and painful to kick.
The Japanese domestic debts reached the same level of 185% of GDP (4.5 Trillion USD) in 1999 & the domestic debt was about 8 Trillion USD The Japanese must have felt the pain of these domestic debts. To resolve this, they slashed the interest rate to negative in order for its people to refinance their debts at much-reduced interests. They managed to reduce the domestic debts to less than 100% of GDP in less than 3 years. But, they lost nearly 20 years of growth thereafter as shown in this attached chart. Historians often term this Japanese loss in economic growth as Japan's "Lost Decade"
Will China suffer the same fate as Japan?
Going ahead, China will need to be very careful in managing its domestic debt. There is a tendency for the debts to explode as evidenced by the bond defaults by big property developers like Evergrande and Shimao. The banks too are not in good shape. The smaller local banks are presently restricting depositors from withdrawing their savings to save bank runs; the larger one like Nanjing Bank has rumours that their off-balance sheet items are not that healthy.
Many must have borrowed from the banks to finance their housing. These people can be very unhappy and reckless if they have no money to pay the bank interests & they are jobless with the banks or developers chasing after them.
It would be harder to expect China can manage its exploding domestic debts better than Japan because:
a) Japan has a longer growth history than China before they faced the "lost decade"; also,
b) The Japanese did not have a long economic enemy list; lastly,
c) The Chinese domestic debt is nearly 3 times larger in value (China domestic debt: 26.79 Trillion USD in 2020; Japan domestic debt: 8 Trillion USD in 1999).
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Update: 28 July 2022: Latest figure on Chinese Domestic Credit Debt
Ceicdata.com has the latest data on Chinese Domestic Credit Debt as shown attached.
The data shows that the Chinese domestic credit debt has risen to USD 42.7 Trillion in June 2022. It has been rising at a rate of about 10% per year. Based on a population of 1.4 billion people, this debt is about USD 30,000 per person. Interest based on 5% will be roughly USD 2.1 Trillion or about 20% of 800 million people's salary @ around USD1,100 per month.
This debt of USD 42 Trillion is about 250% of China's GDP @ USD 17.6 Trillion; in other words, China's domestic credit debts have increased 68% of GDP in a short span of 2 years from 182% in 2020 to the present 250% in 2022.
Because people have been borrowing money heavily, the Chinese banks' bad loans have increased by almost 107 billion yuan (USD 15 billion) in the first half of 2022 to 2.95 trillion yuan (USD 430 billion), according to the CBIRC.
As the economic recovery was slow in 2022, it is expected the Chinese banks' non-performing assets could increase by 25% to 7.5 percent of total lending by the end of this year, The actual non-performing assets of 6 percent last year.
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Update: 5 August 2022: Money Printing
Every country will need to print money to cater to the expansion of its economy.
The faster they expand their economy, the more money they will need to print. If a country prints more than to cater to the economy; for example, to handle the debts or to loan out money to the rest of the World, it will show up in this chart maintained by the World Bank.
The chart shows that Japan is the country that has printed the most money to handle its rising debts; it has printed about 2.8 times the size of its economy. It is closely followed by China, which started printing in the '60s. The printing exceeded the US in 1990 and has never looked back since.
What about Hong Kong and Macau?
Hong Kong and Macau have printed very much more than Japan. Today, Hong Kong's broad money is 4 times more than the size of its economy. Hong Kong is followed closely by Macao which has increased money printing by 1.8 times in 2020. Both Hong Kong and Macao increased their money printing since China took over the counties in 1997.
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Update: 6 August 2022: Outflow of the Rich
Straits Time reported last Tuesday saying the rich Chinese are eyeing to move to Singapore. Henley & Partners, a global investment firm in residence and citizenship, predicted the number of China’s high-net-worth (HNW) individuals leaving the country could become more pronounced this year.
(Doubleclick picture to read the Straits Time news)
The World Bank data as shown in the attached chart clearly indicates that China's GDP growth rates have slowed down recently to 0.4%. The Chinese economy has been slowing down very fast in the last 20 years at a rate of about 10-12% a year.
The Chinese GDP is likely to become stagnant or go even below water in the years ahead. This is because China has a domestic credit debt of about 250% of GDP at the moment. It might mimic the "lost decade" of Japan. Japan started its economic recession in 1999 with a staggering domestic credit debt of about 185% of GDP. It has since lost about 20 years of economic growth.
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Update: 20 August 2022: The Lost Decade
Japan lost not one decade but two decades of growth after its Domestic Credit Debt hit about 187% of GDP in 1999. Before then, the housing price already started falling as shown in this chart. This is also felt present in the Chinese economy. The Chinese Housing prices started to fall in Q3 of 2021.
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