China Debt Worries Are Overblown — It’s Not Japan in the 1990s All Over Again

thestreet.com:

China’s debt load, as of the second quarter of 2014, was a whopping 282% of its GDP, according to a new report from McKinsey. Reports of this number treat it as nearly catastrophic.

But few of these stories mentioned that, according to the same report, Australia’s debt was 274% of its GDP, America’s debt was 269% of its GDP, and Germany’s debt was 258% of its GDP. Yes, China’s debt load is higher than that of the other three countries, but not by a tremendous amount.

It should also be noted that China’s economy is still, even by the most conservative estimates, growing at least two times faster than the other three economies. It’s also interesting that The Economist, in October 2015, estimated that China’s debt load was slightly over 240% of GDP. So, right away, we see signs that China’s debt load may not be as crushing as has been suggested.

When comparing McKinsey’s charts on China’s debt versus that of the U.S., an interesting distinction can be almost immediately seen. Specifically, China’s government and households were far less indebted than those of the U.S., while China’s financial institutions and non-financial institutions were far more indebted. Drilling down to specific numbers, China’s governments owed 55% of its GDP and its households owed 38% of GDP, while America’s corresponding percentages came in at 89% and 77%. America’s financial institutions owed just 36% of GDP, while its non-financial corporations owed 67%, China’s corresponding percentages came in at 65% and 125%.

Many of China’s recent initiatives and actions can be largely explained by the composition of its debt. Given the fact that its households have fairly little debt, while its non-bank corporations have a great deal of debt, it is logical for Beijing to try to transfer wealth from the couhntry’s households to its corporations.

Increasing consumers’ consumption and convincing retail investors to put more of their money in the stock market would meet the goal of transferring wealth from consumers with low debts to highly leveraged companies. And by keeping its currency relatively weak, China is increasing the likelihood that consumers will buy products from highly indebted Chinese companies, rather than spending their money on imported goods.

While it may seem as though the government’s efforts to persuade its citizens to invest in the stock market, to keep its currency low and to drive consumption higher, have been desperate measures meant to stave off looming economic disaster, make no mistake: These initiatives are rational moves that were primarily made to prevent some of China’s most highly indebted businesses from going bankrupt and to, by extension, shore up the positions of its banks without forcing the government to undertake a massive bailout.