Markets

How Worried Should We Be About China?

Developed Equities
Developed Equities
Known Unknowns

  1. Total debt (excluding the central government) stands at 210 percent of gross domestic product ( GDP ), yet the headline figure is misleading. The bulk of this debt is issued by state-owned enterprises and local government financing vehicles.
  2. Non-performing loans ( NPLs ) in China stand at just 1.5 percent of GDP. Yet this low number disguises a number of fault lines. Recorded NPLs are rising at 30 percent to 45 percent per annum. Loans deemed overdue but not yet impaired doubled this year-a sign of negative corporate cash flows and further debt troubles ahead.
  3. The official numbers don't include the biggest problem area: off-balance-sheet loans. Banks don't hold capital buffers against these loans; instead, they treat them as investments. Total bad debts in the system amount to around 11 percent of GDP, UBS estimates.
  4. The problems are mostly concentrated in a few sectors saddled by overcapacity and changing regulations, such as stricter pollution controls. Infrastructure (22 percent of bank assets), manufacturing (16 percent) and real estate (at a likely understated 7 percent) are the main offenders. Caveat: Debt in these sectors is likely worse than it appears. The official numbers only cover the on -balance-sheet exposures of 70 banks.
Financial Sluggishness

Recapturing the Spirit of Optimism

  1. MSCI's inclusion of 14 Chinese firms listed in the U.S. (via American depository receipts, or ADRs), including the e-commerce behemoth Alibaba, in global indices from November.
  2. The potential for a deal by mid-2016 on the Trans-Pacific Partnership trade agreement (this would exclude China but buoy Asian trade over time).
Ewen Cameron Watt, based in London and a contributor to the BlackRock Blog , is Chief Investment Strategist for BlackRock and the BlackRock Investment Institute .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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