Michael Pettis at China China Financial Markets comments on China's debt in a Tweet Thread.

Thread

  1. For those interested in China’s debt profile, this article has a lot of information, to which I have added some. According to China’s National Institution for Finance and Development, China’s debt-to-GDP ratio rose 6 percentage points.over 2019 to 245% by the end of the year. 
  2. According to the Institute of International Finance – which includes categories of debt not counted by NIF – China’s debt-to-GDP ratio rose 11 percentage points in 2019 to 310%, and rose a further 7 percentage points this year.during Q1 to 317%. 
  3. As high as these increases are, my own estimates are that either debt-to-GDP measure will rise by at least 12-18 percentage points in 2020. I would add four additional points. 
  4. First, almost everyone agrees that some categories of debt are not fully accounted for in the data, so both numbers are likely to be understated. 
  5. Second, because China’s GDP measure is not comparable to the GDP of other countries, but overstates it on a relative basis (see the essay below), its debt-to-GDP ratio should .be adjusted upwards to make it comparable. 
  6. Third, debt data for any country always excludes financial debt because to the extent that a financial system is solvent, it’s financial assets and financial liabilities can be netted out. 
  7. But because the liabilities of Chinese banks probably exceed the real economic value of their assets, the difference represents a contingent claim on the government that is not included in any of the debt data. 
  8.  Finally, unlike most governments, Beijing and local governments have substantial asset positions (real estate and SOEs). These can in principle be used to absorb some of the debt-servicing costs, although to date this has proven politically very difficult.
  9. China’s foreign debt has risen sharply from $0.55 trillion dollars ten years ago to $2.05 trillion today, according to this article, but at less than 15% of GDP, and equal to 2/3s of visible reserves, I think it is still quite manageable.

Note: I reformatted the thread to keep key ideas in the same numbered point. In doing so, I increased the number of points by one.

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Mish