China's Debt Load To Hit 250% Of GDP In 5 Years, IMF Says

Tyler Durden's picture

Anyone who follows China knows that the country faces a particularly vexing problem when it comes to debt. The way we explain it is simple: Beijing is attempting to deleverage and re-leverage simultaneously. Needless to say, this isn’t possible, but that hasn’t stopped China from trying, as is clear from the multitude of contradictory policies and directives that have emanated from Beijing over the course of the last nine months. 

Nowhere is the confusion more apparent than in China’s handling of its local government debt problem. In an effort to skirt official limits on borrowing, the country’s provincial governments racked up an enormous amount of off-balance sheet liabilities. These loans carried higher interest rates than would traditional muni bonds and ultimately, servicing the debt became impossible. In order to help provinces deleverage, Beijing launched a program whereby high interest LGFV loans can be swapped for new local government bonds that carry substantially lower interest rates. In fact, yields on the new bonds are close to yields on general government bonds meaning provincial governments are saving somewhere on the order of 300 to 400 bps. But there’s a problem. Banks aren't particularly keen on swapping a higher yielding asset for a lower yielding one. The PBoC’s solution was to allow the new bonds to be swapped for central bank cash which the banks could then re-lend into the real economy. The problem with this is that it transforms a deleveraging effort (the local government refi program) into a re-leveraging program (the LTRO component). Shortly after the program was launched, the PBoC effectively negated the entire effort when it moved to loosen restrictions on the very same LGVF loans that caused the problem in the first place. 

Admittedly, lengthy discussions about fiscal mismanagement across China’s various provincial governments doesn’t make for the most exciting reading, but it’s hugely important from a big picture perspective. Why? Here’s why:

That's from the IMF and as you can see, local government debt will account for an estimated 45% of GDP by the end of this year. If one looks at what is classified as "general government debt", China's debt-to-GDP ratio looks pretty good - especially by today's standards. Simply counting central government debt and local government bonds, the country's debt-to-GDP ratio is just a little over 20%. Thus, if you fail to include the provincial LGVF debt burden, the effect is to dramatically understate China's debt-to-GDP.

Below, find two charts from the IMF, the first showing China's actual debt-to-GDP (i.e. including LGFV financing) and another showing China's total debt-to-GDP (which includes corporate debt and which you'll note is set to hit 250% of GDP by 2020). We've also included some color from the Fund's debt sustainability analysis.

From the IMF:

Without reforms, growth would gradually fall to around 5 percent in 2020, with steeply increasing debt ratios.

 

The general government debt is slightly above 20 percent of GDP over the projection periods. Augmented debt, however, rises to about 71 percent of GDP in 2020 from less than 57 percent of GDP in 2014. Even with the favorable interest rate-growth differential, augmented debt rises over the medium term as the augmented deficit is assumed to decline gradually. 

 

The augmented debt level is also sensitive to a contingent liability shock, which would push debt to near 100 percent of GDP in 2020. Such a shock, for instance, could be a large-scale bank recapitalization or financial system bailout to deal, for example, with a potential rise in NPLs from deleveraging. A combined macrofiscal shock would increase the debt-to-GDP ratio from about 71 percent to 78 percent in 2020.

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Latina Lover's picture

All governments are bankrupt. The only questions are when will investors recognize this, and how will the bankrupt governments respond? IE Bail-ins, asset confiscations, wars etc.

Ham-bone's picture

Chinese total population peaks in 10 to 15 years and begins declining...Chinese core population is already declining meaning the massive increases are going to a ever smaller number of persons, workers, consumers.  Chinese young have been declining since peaking in 1975 and are nearly 20 million fewer than in 1960...

Read all the details here...since no one else seems interested in calling out the facts.

http://econimica.blogspot.com/2015/08/chinas-collapse-is-last-straw-of-global.html

knukles's picture

Well, the Shadow Stats knows it's already there, just like spot on to the decimal place forecast v reported 7% GDP.

No MSG for you.

Money Counterfeiter's picture
Money Counterfeiter (not verified) Latina Lover Aug 15, 2015 8:12 PM

1.3 billion debt slaves massive wet dream comes true.  Sad.

tarabel's picture

 

 

How will the bankrupt governements respond?

Only  two choices: The Weimar Solution or the Falklands Solution. 

My guess is that they'll opt FIRST for the Falklands Solution and then get Weimar as a lovely parting gift, thank you for playing.

JustObserving's picture

Why this relentless China bashing?  US debt is $210 trillion or 12 times US GDP.

In reality we're facing a fiscal gap of $210 trillion, Kotlikoff proclaimed. That's 16 times larger than official U.S. debt, "which indicates precisely how useless official debt is for understanding our nation’s true fiscal position," he noted, and almost 12 times the current GDP of $18 trillion.

http://www.newsmax.com/Finance/StreetTalk/Kotlikoff-GDP-debt-deficit/201...

Latina Lover's picture

Remember, however that the USSA debts are in Fed Reserve Notes, of which 100 Trillion can be digitally created with a push of a button.

The real chumps are the rest of the world, buying USSA treasury toilet paper for effectively negative yields after inflation.

YHC-FTSE's picture

"The real chumps are the rest of the world"

Some chumps and some who don't want their kids to be bombed to smithereens. Most, I suspect, just loaded up on msm rainbows, skittles and rainbows - stuffed to the gills with how wonderful life is in the good ol' USA of 90210. In the UK, especially, I know LOADS of seemingly intelligent chaps who are envious of the whole bullshit they've been forced fed about the wealth, freedumb and the military power of the Empire of Chaos.

As for the article, it's from the IMF, that paragon of predictive analysis as scary as the patterns in a hobo's underwear. 'Nuff said.

Latina Lover's picture

"Some chumps and some who don't want their kids to be bombed to smithereens."

Excellent point.  Moreover, if you have never visited the USA, and only see her via Hollywood films, Music Video's, Print etc, you likely believe that America is proverbial land of Milk and Honey.

tarabel's picture

 

 

Not our fault if the rest of the world's societies are cargo cults.

Max Steel's picture

And its not our fault that that your society comprises of fucktards and koolaiders.

knukles's picture

The "bashing" is not "bashing" but a mere attempt to bring the rest of the world back to the reality of China ain't what most people think China is.  It is not healthy, wealthy and wise.
It is as if not more fucked up that the good olde USofA, EU or anything else. 
Why, maybe a bit better than Africa.  Just like Detroit is a bit better than Africa.

Most of the street and investment managers have no idea what is or is not in China.  Period.  Everything's BLS8 Power.
And they all believe that it's Just Fine, and if it ain't just fine, there'll be a "shock" to the system
And it ain't Just Fine.

U4 eee aaa's picture

When you have stomach cancer, pointing at the skin cancer of your neighbor is disingenuous

philipat's picture

@JO. Agreed. And nobody ever points out that China's debt is ALL internal and they do have around $4.5 Trillion in reserves. They probably have at least 10,000 Tonnes of official Gold which could be revalued if necessary. China for sure has some serious economic problems yet they remain manageable in comparison to some other countries AND unlike those other countries, if China does collapse, it won't hurt anyone but China.

CHC's picture
CHC (not verified) Aug 15, 2015 7:27 PM

Thar she blowssssssssssssssssssssssssssssssssssssssssss!

sunny's picture

SO WHAT!  Japan is buried is debt and continues longer than anyone can imagine.  Count the US debt including unfunded liabilities and we're way up there as well.  As long as we have central banksters, HFT, ZIRP & NIRP and a herd of sheeple populating all these countries Debt. Doesn't.Matter.  I truly and sincerely wish the fates or someone would prove me wrong.

km4's picture

US Total Debt is 334.6% of GDP for Q1 2015  http://ycharts.com/indicators/us_total_debt_gdp so what's your point ?

U4 eee aaa's picture

I don't think America's leadership (as corrupt as it is) and people will panic when things go south (not the fringe but the people at the core that are steering us in this direction). Can you say that about a government and people who have never experienced a significant financial crisis before?

NoDebt's picture

Every major economy it's the same old story- too much debt choking the life out of the "real" economy (if there even is such a thing).

Only difference is who's carrying that debt which varies from one country to another, but the end result is the same.

When everyone finally figures out that there will be NO MORE GROWTH EVER, we'll be back at eachother's throats in the classical, time-tested format- wars.  Big ones, not the little spits going on today in the ME and Ukraine.

cowdiddly's picture

So the IMF starts finger pointing by adding government. local and private sector debt to give this figure. Trying to take everyones mind off the real bankrupt countries? My god if we did that to US debt I don't think calculators could handle it.

Im pretty sure they still have a huge chunk of that 3.4 Trillion in reserves.

NoDebt's picture

Why does everyone keep bringing up their large FX reserves?  You realize that's just some other bankrupt country's debt they're holding, right?

 

cowdiddly's picture

well since about 1.4 trillion of it is ours, whats your point, we good for it or not? and besides Japan is above 250 GDP with just gov debt alone and now not in 5 years.

NoDebt's picture

No, we're not good for it.  Neither is Japan.  Neither is anyone.  They're holding toilet paper that we traded them for real goods.  

cowdiddly's picture

Fair enough but I think they understand that and after lightening the load 180 billion last month, if that trend continues the Fed better get its wallet out which already has a 5.2 trillion credit card maxed out.. Which is actually what I believe all the hit pieces are about

NoDebt's picture

China deserves the hit pieces about their debt same as we do.  Borrowing money is only supposed to happen when such an investment of borrowed money can generate greater productivity/output/wealth in the future.  It no longer has the capacity to do that.  We've already passed the Rubicon in that respect.  Now everyone just borrows to pay back previously borrowed money.

There's another article up right now titled "The Crisis is Spreading:  China, ......."  That article lays out an argument similar to the one I'm offering up.

cowdiddly's picture

Welcome to a fiat world.

Yeller said it would take 7-8 years just to unwind what they already have without collaping something even if most of it was not worthless? Remember the MBS they bought? yep that's some choice paper.

At some point the Rothchilds and Warburgs or whoever backs the fed is going to say enough and pull the plug. A greedy bunch of rich men can't stand to lose money forever when hope is dwindling or chances to get it back become slim. As for the lies your right they are all lying.

NoDebt's picture

Yep.  That's basically it.  Once you realize it's not just a problem "here and there", but a nearly universal, worldwide problem, you usually throw up a little in the back of your mouth (I did when I first grasped the enormity of it).

cowdiddly's picture

Yes it spans the globe and we are in uncharted waters. this might become a disaster for the ages. There is no way to pay all this back without destroying what little value a thousand fiat currencies ever had, The world debt is already to large. Keep kicking the can and it just gets bigger and bigger. Noone wants to address it, ANYWHERE Hedge accordingly

knukles's picture

But it's still MOAR, Goddammit! 
Enuf with the negative vibes, Moriarty

NoDebt's picture

That bridge is still there becuase I believe it's still there.

tarabel's picture

 

 

Then make a deal.

A deal? What kind of deal?

A deal deal. You think he knows what's sitting inside that bank?

NoDebt's picture

Glad to see there's still a few fans who remember that movie.

Mini-Me's picture

It's a mother beautiful bridge, and it's going to be there.

tarabel's picture

 

 

You know, upon further review, this really should be the Official Movie of ZH. Here's the main title as a little teaser for the uninitiated.

https://youtu.be/kgeIINs1TrQ

Bro of the Sorrowful Figure's picture

was driven to watch it a couple weeks ago after i saw it quoted in the ZH comment section. awesome flick. love the reactions when kelly first shows everyone the gold bar at the beginning, as well as their facial expressions when they strike gold in the end. i had the same expression i bought my first few oz of shiny. 

Apostate2's picture

The IMF only forecasts according to what is apparent or provided by the Ch.gov. Internally it is estimated that 99% of local and provincial-level gov. debt has been 'mis-reported' i.e. hidden. Therefore, the pig-pong policy switches and IMF misses.

 

 

skank's picture

"Hypocrisy is not a way of getting back to the moral high ground. Pretending you're moral, saying your moral is not the same as acting morally." - Alan Dershowitz

Cornfedbloodstool's picture

Didn't that kike come out in favor of torture not too long ago.

Soul Glow's picture

Debt is growth in Neo-Keynsianland so this has to be bullish.

:)

Atomizer's picture

If the IMF stated this, it must be true.

What will the Global financial country club do to invest new membership wanker expansion and elevated membership fees to offset a dry trough? 

Atomizer's picture

Three Things You Need to Know about China’s Economy

http://www.imf.org/external/mmedia/view.aspx?vid=4422444375001

Yeah, I get so excited when a metrosexual communicates a upbeat spin. Here's a good fairytale...

The True Story of the Three Little Pigs - YouTube

 

 

 

Yen Cross's picture

 The weather is pretty nice in Kali. It's really tempting to let down your guard.

 I'll just keep studying all those worthless, FED. backed charts.

 Yeah, T/A and price action are meaningless?

 Central banks have already lost control, and you're just not catching it.

 Schiff was pretty savvy, with the China, spend-down theory.

The Blank Stare's picture

Central Bankers running the world, time to buy that little farm I've always wanted.

 

Anyway, I thought Tom destroyed the IMF?

fowlerja's picture

Sounds like they need someone to help them out of this situation...I know.. let them hire Ben Bernanke..he has alot of experience and expertise...

Yen Cross's picture

 My nicely traded 'non algo' long metals, hedged (food) vs (refiners) 1/2 is working perfectly.

 I'll let you gals/guys. Girls have better memories<  Know how the other side of my hedge works out.

  FX and Bond traders are pretty darn smart.