McKinsey: China Quadrupled Debt Reveals A Troubling Picture

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Influential consultancy, McKinsey Global Institute, recently
published a new study stating that China’s debt has quadrupled
since the financial crisis in 2007. That’s far above the average
for developing countries and higher than some developed
countries, which really makes investors worried.

Economists from China state that China’s economic situation
is a lot worse than that in Japan during its economic crisis.

According to the study , China’s debt has quadrupled since 2007,
rising to trillion by mid-2014, from trillion in 2007.

It’s equivalent to 282 percent of its GDP of 2014.

It stated that three developments are potentially worrisome:
half of all loans are linked, directly or indirectly,
to China’s overheated real-estate market;
unregulated shadow banking accounts for nearly half of new
lending; and the debt of many local governments is probably
unsustainable.

The reports says that China’s debt level is far above the average
for developing countries – higher than some advanced economies
including Australia, the United States, Germany and Canada.

According to the BBC, it is surprising to see China as a
developing country is even more indebted than the developed.
http://www.bbc.co.uk/zhongwen/simp/world/2015/02/150205_china_debts

Zhang Qingxi, Economics Professor, National Taiwan University:
”I think China’s total debt hasn’t been completely calculated
because the debts of local governments aren’t published.

Because of the lack of transparency, it’s very challenging
to get accurate numbers. Even the central government
doesn’t clearly know the debt situation of local governments.”

Yu Yongding, committee member, China Academy of Social Sciences,
pointed out that much of the financial crisis is essentially debt crisis.

The ratio of a country’s debt to its GPD is very important.

In China, the area that is most perilous and worth more attention
is local government debt. Not only is it hard to know the exact balance,
but its willingness and capability to pay off the debt is open to doubt.

Based on calculation from McKinsey, if half of the real estate
debt defaults, with 80% of non-recoverable loss,
China has to increase its debt level as much as 79% of its GDP
to save the crisis.

Yang Bin, economist from China:”It’s too challenging to be
indebted as much as 79% of GDP.

It’s not only about financial crisis,
but even entity economy is weak as well.

Now none of the economic indices look good. ”

Economist Yang Bin pointed out that China’s postponing
social security benefit payment time for another 10 years is
directly correlated to its current debt situation.

Zhang Qingxi: “Japan’s bubble problem caused its banking
problem.

Right now, China’s problem is more severe than Japan’s,
especially its underground finance and shadow banking
as well as local government debt. These are all not
transparent at all.

China’s economy is about to collapse
and it will be worse than Japan.”

In the 1980s, Japan’s land price rose fast.
In the late 1980s, a bubble economy formed and
Japan’s economy showed fast growth, “superficially beautiful.

In 1991, Japan’s “bubble economy” fell apart and its economy
stagnated for a long time, which also triggered financial crisis.

That has been called “the lost 10 years”.

Yang Bin: “Both China’s debt and GDP is comparable to Japan.

Nonetheless, China’s income per head is non-comparable to Japan.

China can’t sustain what Japan can.

Right now China’s economic structure is very weak.

Because of the severe income inequality,
consumption from the middle-class is not enough
to push economic development.

Even though Japan hasn’t collapsed, we are facing all kinds
of crisis.
Both political structure and economic structure are very weak.”

Since the bursting of a global credit bubble resulted in
the worst financial crisis in 2007, all countries vowed to cut
spending and lower debt level.

Facing the pressure from economic slowdown,
especially the slowdown of real estate industry and manufacture,
China’s government hasn’t constrained its debt level.

Based on the observation of economists,
newly issued debts have flown into real estate industry.

Based on the statistics from “Xinhuan Agency”,
each household owns more than one property already.

Yu Yongjia states that this phenomenon means a mis-allocation
of resources, which will ruin China’s economy.

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