Business / Economy

Moody's says debt amid slowdown will not spark a crisis

By Zheng Yangpeng (China Daily) Updated: 2015-12-03 09:53

China's debt buildup is continuing despite economic slowdown, but for the time being, it won't trigger a financial crisis, said a credit officer with global credit ratings agency Moody's Investor Service.

Moody's noted China's overall credit growth is still outpacing nominal GDP, leading to higher debt-to-GDP ratio. In particular, corporate debt has reached 160 percent of GDP in mid-2015, twice the level in the United States, according to a Thomson Reuters study, and among the highest in the world.

History shows such a debt overhang usually precedes a financial crisis. But, Michael Taylor, chief credit officer for Moody's Asia Pacific region, told China Daily he did not believe this is the case for China.

Certain features of the country's financial system distinguish it from other economies, he said.

China's capital account is still relatively closed, which acts as a "major defense" against big inflows and outflows of capital.

"This is why, looking ahead, opening up of the capital account should be managed carefully because though moving toward an open account in the long run is a positive development, it means you start to dismantle the defenses," he said.

The second reason is China's domestic saving is very high, which means most of the debts are domestically funded. "If you look at the economies that got into real difficulties, a lot of debts are borrowed overseas," he said.

Most of the debt is held by State-owned banks, which means there is plenty of room for maneuver. What's more, China saw its debt growth in the early stage of its development, which means growth potential underpins the debt.

"The real trick is, leverage could be reduced by growing the economy. What you have to do is to grow the economy in a way that doesn't increase the debt burden, which is why I argue finding new growth drivers really is the key to future rebalancing," he said.

New engines could be consumption and service, especially e-commerce, according to Taylor. The worry, though, is while consumption is picking up, it is not fast enough to replace the gap left by investment slowdown.

"Without identification of new engines, even the 6.5 percent GDP growth is hard to achieve in the next five years," he said.

To allow private sector and new industries to flourish, a critical task is to allow "zombie firms" that lose money heavily but are sustained by credit support, to die.

The phenomenon is so entrenched that, according to a China Chengxin International Credit Ratings' estimate, 63 percent of bonds issued this year have been used to repay existing debt, up from 45 percent in 2012.

Assuming an interest rate of 7 percent, annual interest payment alone accounted for 17.6 percent of China's GDP.

This is not sustainable, but there is a dilemma over closure of zombie firms, mostly State-owned enterprises, because it would entail massive unemployment. There are no easy solutions, Taylor said .

"We believe the central government will proceed quite cautiously. They'll be willing to permit some defaults and close down, but this will not be a widespread pattern. On the one hand, we'll continue to see bailouts and on the other, (there will be) more 'selective' defaults in selective industries."

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