China’s financial leverage continues to grow


The amount of stimulus injected into the economy in the first three months this year was stunning to some analysts. Larry Hu, an economist at Macquarie Group, says policy makers went into “panic mode,” pumping 2 trillion yuan to 3 trillion yuan ($293 billion to $439.5 billion) of extra spending and credit into the economy. Government spending on rail, highway and other transportation projects jumped 47% in the first quarter from a year earlier.

Outstanding credit growth — including bank loans and bonds issued by companies — grew 10.7% at the end of the first quarter from a year earlier, central-bank data showed. Local governments used up 40% of their annual new-bond issuance quota in the first quarter alone, leaving limited room for localities to borrow later in the year, Moody’s said.

The efforts seemed to pay off: The economy expanded 6.4% in the first quarter from a year earlier, according to government data. The pace was the same as the end of last year — pointing to stabilization — and industrial production, lackluster at the start of the year, roared in March.

But some analysts worry that China’s ammunition is becoming constrained. After tax cuts, total tax revenue growth slowed sharply in the first quarter due to a drop in personal income tax collections. Slowing revenue but faster spending drove up the central government’s deficit. The government targets a deficit of 2.8% of gross domestic product this year. Economists say the actual deficit is already on track to top that target.

China has increased Total Debt to GDP 2x in the last ten years, and Household Debt to GDP 3x. Also, debt is 160% of GDP in China, versus 74% in the USA – a pretty remarkable difference. Given these figures (even given the FT analysis of the other day), stable trading markets in the US and China are – quite logically it seems to us – pricing in a fairly nice trade agreement between the two countries in a little while.

One Response to “China’s financial leverage continues to grow”

  1. feeblemind Says:

    As China navigates the challenges of a slowing economy and a bruising trade war with the U.S., some foreign observers have become alarmed. “Economic decision-making has become incredibly personalized under Xi. An economist who raises questions may be seen as raising questions with Xi personally,” says Julian Gewirtz, a researcher at Harvard and the author of Unlikely Partners: Chinese Reformers, Western Economists, and the Making of Global China. He calls the resulting chill “a profound source of risk for China’s future.”

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