Musical Chairs: SOEs Deleverage, Private Debt Soars

The liabilities-to-assets ratio at industrial SOEs dipped two percentage points from the end of 2016, to 60 per cent at the end of April this year. By contrast, at private groups this ratio has climbed six percentage points to 56 per cent.

...Higher leverage at private groups partly reflects rebound in investment in recent months. Fixed-asset investment by privately owned groups outpaced that by private groups in the first four months of this year, reversing a pattern that had held since mid-2015.
The second private should read state-owned. Also, it refers to the growth rate of investment, not the total value. Private investment has always been a larger share of total investment. Private fixed-asset investment growth outpaced SOE FAI growth in the years leading up to the last "deleveraging" effort in 2014. The government stimulus efforts then kicked in and went into overdrive in late 2015 and early 2016. As a share of FAI, SOE investment was as low as 30 percent in the years before the stimulus kicked in and peaked at 38 percent at the end of 2017.
China’s ratio of debt to gross domestic product rose just 0.4 percentage points last year to 256 per cent, according to the Bank for International Settlements. That compares with an average yearly increase of 13 percentage points over the previous decade.
Given the numbers are so large, a static example shows how this cannot be or China is hiding a serious slowdown. A 13 percentage point increase in debt-to-GDP requires roughly 10.4 trillion yuan in new debt (assuming 80 trillion yuan GDP). A 0.4 percent increase requires 0.3 trillion. Even if China only gets a 10 percent return on its investment (ignore interest rates), a decrease of 10 trillion yuan would reduce GDP by 1.3 percentage points.

If China doesn't report a significant slowdown in GDP (or at least in the better data sets) and there's no offsetting growth surge (real or nominal), then it isn't deleveraging. At best, China's deleveraging effort thus far has merely swapped state-owned debt for private debt. And now that process may have run its course with credit conditions triggering defaults at smaller firms (the FT article also notes that ~90 percent of corporate bond sales went to SOEs). Which may be why we saw an RRR cut in April and a surge in MLF in June. If this is the case, the slowdown in fixed asset investment growth should accelerate in the coming months. And maybe by autumn, I'll post an article similar to this one from October 2014: Liaoning Sounds Warning on Chinese Economy

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