China Credit – A Time Bomb?

by Patrick Liew on August 1, 2017

I chanced upon an advertisement by Temasek Holdings.

It Is interesting to note that Temasek has identified China credit as one of the three challenges to its growth.

There were no detailed explanation on how Temasek perceived this challenge and how it will impact Temasek’s investment strategies and returns in the future.

Suffice to say, there are genuine concerns about the way Chinese banks and especially smaller banks are extending cheap loans through their operations.

They are also extending these loans directly and indirectly through other entities, including trust companies and other financial institutions.

These loans, both on and off balance sheet have been mounting and will pose potential challenges to stability and growth of the Chinese economy.

In 2011, the World Economic Forum (WEF) predicted that China’s debt would increase to $20 trillion by 2020. By 2016, the debt level has arguably ballooned to $22 trillion.

In the first quarter of 2017, the added level of China’s debt is about 40 percentage points of GDP.

It’s not difficult to envisage debt level reaching $50 trillion by 2020 unless China embark on major fiscal interventions.

When the debt level reach an untenable level, it may lead to negative sentiment and financial contraction, resulting in serious damages to the Chinese economy.

These damages may even spill over to economies that are dependent on China’s stability and growth.

In the past, relatively cheap loans have been invested into infrastructure projects and over a protracted period of time.

They are estimated to be almost 50% of China’s GDP.

These infrastructure projects may not improve productivity or may take awhile to generate returns.

The questions that should be uppermost in the minds of policy makers, entrepreneurs and investors are as follows:

Can China reform its governance of the private sector and enforce discipline in the banking and financial systems?

Can the Chinese leaders control unwise spendings and manage the resulting slowing down of the economy without causing hiccups to its growth?

Can the Chinese authorities boost domestic consumptions to support the economy?

Can Chinese enterprises increase their value-creation initiatives and boost their capacity and capability in order to increase productivity and to compete with other developing nations?

Are the Chinese authorities able to sieve out loss-making investments, bearing in mind these investments can continue to be unprofitable for a long period of time before being uncovered?

Will they be able to carry out proper interventions to respond to and resolve the resulting fallouts?


I hope this message will find a place in your heart.

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