Home / Opinion / Sweet spot between bubbles

The words ‘sweet spot’, in a recent Financial Times news story on China’s ‘improved’ economic conditions caught my eye. The phrase is attributed to the China economist at Macquarie Securities. The recent spell of non-instability in China is due to the revival of a property bubble it never really deflated. The details of China’s so-called recovery from the days of ‘falling off the cliff’ are far from flattering.

Chinese companies are cancelling debt offerings. Either no one is willing to lend to them, or they are up to their necks in pre-existing debt. According to Bloomberg, Chinese companies cancelled more than double the amount of bond offerings in March compared with a year earlier, as mounting defaults increased financing costs. At least 62 Chinese firms postponed or scrapped 44.8 billion yuan ($7 billion) of planned note sales last month, compared to 23 companies with 15.7 billion yuan a year ago.

Yet, debt is surging. Data compiled by the Bank for International Settlements show that China’s non-financial private sector debt is 205.2% of gross domestic product (GDP)—as of Q3 2015— and the general government debt is 43.5% of GDP. So, as per this count, China’s debt/GDP ratio is 248.7% of GDP. This ratio was 234.2% in December 2014 and 220% in December 2013. Royal Bank of Scotland puts the numbers more starkly. Post-2008 crisis, China’s non-financial private sector debt has risen at a rate of $6.5 billion per day. This is rebalancing and restructuring with Chinese characteristics. That is why Vincent Chan, head of China research at Credit Suisse, notes that he is afraid of the medium-term and long-term prospects of the Chinese economy. It would be useful to know his definitions of short, medium and long runs.

It is not clear if the general government debt includes debt owed by local government financing vehicles. Surely, the ratio cannot account for loans taken from ‘shadow banking’ vehicles. A recent research report by Bank of America-Merrill Lynch warns us that a credit crunch could be triggered by the rising defaults in shadow-banking products defined as non-bank-loan debt instruments that include bonds, trusts and credit products offered by peer-to-peer (P2P) and various offline wealth management companies.

Although an index of loan demand has declined and credit growth has cooled, it is running well above nominal GDP growth. It seems that some are borrowing merrily. Some of the new borrowing is to refinance existing debt. Maybe it is now the turn of real estate developers and construction firms to borrow (again). China has abandoned any pretence of rebalancing (how many times do we have to restate the obvious?) and has reignited a property bubble through renewed lending. The real estate bubble of 2012-14 gave way to a stock market bubble last summer. Once it collapsed, it was the bond bubble as yields on local government debt were brought down by orchestrated demand from banks. Now, the bond bubble had given way to a real estate bubble. Home prices in Shenzhen have risen more than 57% in the past 12 months, according to official data. In Shanghai, home loans tripled in January from a year ago. The Wall Street Journal warns of a sub-prime crisis in Chinese real estate as the same fraudulent practices that were pervasive in the US now play out in China.

A working paper published by the International Monetary Fund (IMF) in April 2015 paints a graphic picture of the real estate overinvestment and excess capacity in China. It has more floor space per capita than either Japan or South Korea. Its real estate downturn that started in 2014 started from a much higher level of inventory of unsold homes than the previous downturns in 2008 and 2011 did. The frequency with which these booms and downturns occur in China is indicative of orchestrated cycles in various asset markets in China. IMF researchers concluded their paper with the recommendation that China should allow this multi-year adjustment process to take place. But, instead, the latter decided in favour of restarting a real estate bubble in select cities. The solution to an excess supply problem is lower prices and not a real estate bubble. Authorities might have been too clever in thinking that developers would use the profits from the bubble in Tier 1 cities to liquidate inventory of houses in Tier II and III cities. But, the opposite is likely to happen. Developers would think that, if they waited long enough, the government would engineer another bubble in those cities too!

It is worth noting here that the European Union is actively considering the status of a ‘market economy’ (yes!) to China before the end of this year. Britain heralded the beginning of a special relationship with China last year. This year, thanks to its massive excess capacity in steel, China decided to impose duties ranging from 14% to 45% on steel imports from Europe, including from Tata Steel Ltd’s beleaguered Port Talbot steel plant in the UK. That is special.

To understand the real sweet spot that China’s economy is in, readers should check out a presentation by the Royal Bank of Scotland, compiled in February. They have ‘upgraded’ their assessment of the Chinese economy from bumpy landing to hard landing.

V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.

Comments are welcome at To read V. Anantha Nageswaran’s previous columns, go to

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