Sunday, July 17, 2016

China debt fact of the day

From a Bloomberg article on China's fascination with high speed rail, whose network has grown to nearly 12000 miles in just under a decade,
In May, state-owned China Railway Corporation, the operator of China's rail network, reported that its debt had grown 10.4 percent in the past year and now exceeded $600 billion; in 2014, roughly two-thirds of that debt was related to high-speed rail construction. That’s more than the total public debt of Greece. The company runs only one profitable line -- the massively traveled Beijing-Shanghai corridor.
That is a staggering number. The debt of just China Railway Corporation is 30% of India's GDP!

Update 1 (15.08.2016)

IMF's Article IV consultation had this to say about China's ballooning debt pile outside the banking system,
International Monetary Fund staff said that 19 trillion yuan ($2.9 trillion) of Chinese “shadow” credit products are high-risk compared with corporate loans and highlighted the danger that defaults could lead to liquidity shocks. The investment products are structured by the likes of trust and securities companies and based on equities or on debt -- typically loans -- that isn’t traded... The “high-risk” products offer yields of 11 percent to 14 percent, compared with 6 percent on loans and 3 percent to 4 percent on bonds, the commentary said. The lowest-quality of these products are based on “nonstandard credit assets,” typically loans.
These products are mainly issued by banks and attract retail investors with their high returns. Such products grew nearly 50% last year to 40 trillion renminbi ($ 6 trillion). The FT writes,
Shadow banking emerged as a force five years ago, ranging from interbank transactions through to wealth management products. By recording the products off-balance sheet, or by classifying them as “investments” rather than loans, banks are able to report higher capital adequacy ratios and set aside smaller provisions against bad loans.
The Times describes these wealth management products,
China’s wealth management products are neither stocks nor bonds nor mutual funds. A typical wealth management product offers a fixed rate of return over a set period. Many Chinese investors treat them like bank savings deposits because many are sold by state-controlled banks that give the funds the appearance of government backing. But unlike bank deposits, they are uninsured. They are also typically structured so that the banks are not responsible if the investments fail. Among the biggest issuers of wealth management products are hundreds of banks and other financial institutions in poor, inland provinces. These banks are under intense pressure from provincial political bosses to keep lending and help sustain big employers like state-owned enterprises, at a time when the entire country’s economy is slowing. To raise money for large-scale lending, banks have ramped up issuance. They sold 187,000 separate wealth management products by the end of last year, up 56 percent from a year earlier, according to official statistics.

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