Total China debt reached 258% of GDP in Q1 2020, says Natixis

June 22, 2020

HONG KONG - The global finance group Natixis has updated its estimates of debt dynamics in China, finding that total debt, as a percentage of GDP, rose as much as 11 percentage points of GDP in the first quarter of 2020, to 258% of GDP from 247% at the end of 2019. Natixis says most of the increase came from the corporate sector (excluding LGFVs), which resulted in a 7% jump to 129% in corporate debt as a percentage of GDP in Q1 2020.

It said China banks' corporate loans rose to 81.1% of GDP from 76.4%. and corporate bond issuance reached 18.4% in Q1 from 16.4% at the end of 2019.

"Caution seems to have remained as regards shadow banking borrowing because it still witnessed negative year-on-year growth rate during the first quarter of 2020." Natixis says.

"Compared with corporate debt expansion, rises in Government and household debt were less significant. On the Government side, there was a rise in on-balance sheet Government debt from 38.5% to 41.0% in Q1 2020.

"Off-balance sheet public debt is much harder to estimate, as borrowing by LGFVs and other public sector actors are not easy to estimate.

"Based on bond issuance, and aware that bank borrowing is not available, there seems to be a very moderate increase in off-balance sheet financing by LGFVs (less than 1% of GDP in Q1 2020).

"Household debt experienced only a moderate increase, to 57% of GDP. The current growth pace in household debt was not exceptional compared with the earlier trajectory since 2015 from 39.4% to 55.8% by end-2019.

"This might be related to the negative impact of Covid-19 on housing purchases and, thus, mortgages, as well as the push to increase precautionary net savings given the increased uncertainty."

Naetixis says: "While the overall situation looks worrying, we must bear in mind that the sharp rise in debt ratios come at a time when China's real GDP growth has turned negative.

"If we counterfactually adjust the GDP, the denominator for our debt ratio, to experience 8% nominal growth for the first quarter in 2020, the overall debt ratio would have only increased to 250% in Q1 2020.

"In other words, a faster-growing environment will significantly change our assessment regarding the speed of China's indebtedness in Q1. This means that nominal growth holds the key to China's debt sustainability." (ATI).