China’s Debt Piles Up Fast, Experts

Fresh loans since the start of the year prompted analysts to caution against the risks reckless borrowing may pose to China’s financial system. Recent reports warn that China’s debt piles up fast, and there may be hard-to-manage consequences.

Standard & Poor recently noted that the country’s debt, which has seen a big increase relative to its GDP in recent months, may put a strain on its credit ranking. Experts believe that a boost in credit could spell big trouble for the Chinese economy, the currency, and stocks.

Other experts believe that the country’s central bank may have lost regulatory control on credit. As of January, China’s debt mounted to a staggering 3.42 trillion yuan, or 525 billion U.S. dollars.

Analysts believe that the recent loans were only conjectural, but they warned that, if the situation continues, the country may experience a surge in bad debts as businesses would no longer find profitable projects to engage in. Plus, China currently struggles with the slowest economic growth in the past 25 years.

George Magnus of the UBS Group believes that while credit expansion may help the Chinese economy maintain momentum on the short run, it may cause ‘big problems’ later on. Magnus, a chief economic adviser for the USB Group, has accurately forecast the July slump on the Chinese stock market.

Nevertheless, Magnus did not tout the idea of a meltdown. He only counseled cautiousness until the end of the year. China’s debt versus GDP jumped 209 percent in the last quarter. Bloomberg experts noted that it is the highest jump since they started to gather the data in 2003. Bad debt spiked 7 percent at the end of last year to 1.27 trillion yuan.

Currently, China’s S&P credit rating is AA, but according to a report released last fall, the country could be downgraded if the government attempted to boost economic expansion by pumping more credit into investment spending.

Experts, however, do not believe that Beijing may repeat the 2008 and 2009 moves when it urged lenders to lend as much as they could. Yet, analysts are concerned that the country’s leadership is not willing to curb leverage, despite the official rhetoric that they are working to fix the country’s rampant debt.

The People’s Bank of China and several state agencies pledged Tuesday that they would take measures to fight off overcapacity and prevent loans from being granted to ‘zombie’ businesses.

Magnus noted that most of these promises are empty talk since there aren’t any concrete measures set in place to rein in the tidal wave of new credit impacting the economy.