China's debt issues persist - despite its official rhetoric
Rhetorically, China certainly seems serious about deleveraging. Everyone from President Xi Jinping to the People's Bank of China (PBOC) to the Public Security Ministry has lately warned about controlling financial risks and promoting stability.
In reality, though, there's been no deleveraging to speak of. New total social financing grew by 14.5pc in the first half of 2017, up from 10.8pc in the same period last year and rising roughly 3pc faster than nominal gross domestic product.
It's true that measures such as credit intensity and the stock of total social financing to GDP have flattened or declined somewhat, but this was due to a temporary surge in commodity prices, now receding quickly.
China isn't so much deleveraging as changing who borrows. Loans to non-financial corporations, for instance, have in fact been scaled back: they're up a relatively modest 8pc. But total loans to households are up 24pc. "Portfolio investment" - code for bank holdings of wealth-management products (WMPs) - is up 18pc. Combined, household debt and portfolio investment are now 13pc larger than corporate debt outside the financial sector, and growing by 20pc on an annual basis.
Just as worrying is where this debt is flowing. Wealth-management firms are routinely encouraged to push up commodity prices to drive growth. Total capital inflows from WMPs into commodities rose by 772pc between January 2015 and June of this year. By tonnage, iron-ore futures trading on July 31 exceeded China's entire iron-ore output for all of 2016.
Given this flood of capital, it's not surprising that iron-ore future prices are up 87pc since December 2015. The government is trying to solve its overcapacity problem by having investors and banks prop up prices - even if output and consumption are stable or declining. Relying on triple-digit gains in commodities isn't a good way to promote stability or sustainable growth.
Another concern is that the mythically prudent Chinese household is no longer quite so prudent. Total household debt now exceeds 100pc of income. Most of this debt is flowing into real estate.
Meanwhile, risk continues to build. Corporate deals are still going through on worrying terms. Wealth-management products are increasingly risky as they substitute for bank loans to borrowers locked out of the traditional market. Rising household debt carries problems all on its own.
Everyone seems aware of these dangers. The PBOC has lately been warning about real-estate bubbles and credit problems, while the IMF has sounded the alarm about systemic risks. Startlingly, prescient posts have surfaced on Chinese social media warning of problems at numerous companies well in advance of official crackdowns.
Even so, action is needed more than words. True deleveraging will require some painful steps, such as denying businesses new funding, letting more companies fail and accepting the potential increases in unemployment that result. That won't be fun for anyone, but it will signal - as nothing else has - that China is finally serious about these problems. (Bloomberg)