After the beginning of the financial crisis in 2007, both emerging and developed countries were forced to react with all the tools they had available. China’s strategy was to boost domestic consumption to compensate for the economic weakness of Europe and the United States by launching large fiscal and monetary stimulus plans.
Indebtedness of the public and private sectors
All these measures caused a dangerous indebtedness of the public and private sectors throughout the Asian giant. Now is when those side effects of the commitment to public investment and financial bets begin to be seen. In the Asian giant bond market, it has become the third largest fixed income market in the world.
According to data from “Good Finance” has established China’s total debt, both public and private, has reached unprecedented levels by representing 260 percent of Gross Domestic Product (GDP), 160 percent of companies, 60 percent of the government and 30 percent of the families. Under this scenario, the consensus of experts states that it could be the third bubble to explode in China after real estate and the stock market.
According to Good Finance data, the Chinese giant’s corporate bond market is overheated.
Chinese companies sold the record of 550,000 million dollars in bonds in the third quarter of 2015, representing an increase of 90 percent over the same period last year, as borrowing costs decreased to a minimum of six years . The situation that could worsen if the macroeconomic deterioration continues because excess liquidity is causing bubble to bubble around the world.
In 1990, more than 8 percent of high yield companies failed to pay in the United States. In 2002, more than 16 percent and in 2013, 13 out of 100 companies did not pay their debt. The ratio of companies in China that have fulfilled their payments with respect to the number of total companies is almost nil. In an economy whose Gross Domestic Product (GDP) has increased by an average of 10 percent during the last decade, it is difficult to have a high percentage of unpaid. Now that grows between 6 and 7 percent there is the same trend.
The Western press usually has a bias, a Germanic term that reflects a feeling of pleasure about the negative things that happen to the rest. They seem to be waiting for the Asian giant to happen something and fall. This may recall the negative bias of the United States press on Europe and the euro.
From the GFIC bank they expose that this rebound in emissions due to the change in regulations that took place at the beginning of the year, and now all companies can issue bonds. Previously, it was a fairly restricted market to those companies whose shares were listed on the Shanghai and Shenzhen stock exchanges. The International Monetary Fund also looks with concern to the Asian giant, which is among the economies with a debt greater than 25 percent that experts believe would be appropriate.
Make this bubble explode
Now we have to ask ourselves what could make this bubble explode. You can consider three things that could make it explode, the first would be the liquidity crisis, difficult in a country where Chinese banks belong to the state, the second could be the rise in interest rates, which could cause the Long-term fixed income had falls and the market lost its appeal for it, or the third that would be the balance sheets of companies deteriorate excessively.
Also a devaluation of its currency, the yuan, could have negative effects causing foreign investors to withdraw their investors from the yuan due to expectations of additional depreciation of the currency. Experts consider highlighting that not investing under the pessimistic argument of bubbles and volatility is to ignore what will be in a few years the largest economy worldwide.
It has to be said that the economy is not an airplane, so there are no soft landings, model changes can have devastating consequences. They face the third side of the Chinese giant’s debt. Despite the respite from the Gross Domestic Product (GDP) figure for the third quarter, which indicated an increase of 6.9 percent, one tenth higher than expected, the production price index has been the worst for two years, which shows us the overcapacity of the Asian giant and the need to transfer exports. Therefore, they are making a progressive adjustment to reduce the excess of recent years. The market is slowing down after discounting the slowdown suffered by the Asian giant.
Since the beginning of the year, three companies of the Asian giant have suffered in suspension of payments. The construction company “Group Holdings” became the first large real estate to pay off its debt, in the middle of the year the Chinese government came to the rescue of the company.