China’s corporate debt reached a level that for other countries represented the beginning of a financial crisis.
The program to convert debt into equity of Beijing adopted last year will not solve the country’s problems, and China will not be able to overcome this crisis.
The Chinese government will have to sacrifice growth and political capital to reduce debt rising or risk a banking crisis suggests an analysis of Stratfor.
Since the 2008 financial crisis, China has accumulated a huge amount of corporate debt, volume in other countries signaled tough times. China is no stranger to such problems and is now seeking the same remedies used in the past, but the current circumstances are different.
Because the Chinese economy is controlled more strictly than most other economies, Beijing has a capacity to a greater influence than Western countries have had in similar situations.
However, any action taken by China will only defer to problems rather than solve them once and for all.
China’s corporate debt is advancing steadily for years. After relied on exports for growth before 2008, Beijing has filled the hole left by declining demand for its goods by encouraging local investment.
In time, however, these investments have led to growing inefficiencies and declining yields, and major steel producing companies of China were left with too much debt.
Given that corporate debt is currently 169% of China’s GDP, companies were launched in the conversion of debt by copying the approach taken by the authorities to solve similar problems in the 90s.
The current conditions are different, however, and there is no guarantee that the program will have the same effect.
China emerged from the Asian financial crisis of 1998 overwhelmed by a large volume of bad loans from 1999, companies managing assets created by authorities bought loans bad, using funds from the central bank at face value, taking all losses attached. Thus, public money saved troubled institutions of China and taxpayers have borne the cost.