NEWS

Some time ago, there are 1 trillion of local government debt replacement, fears that China’s debt is not too much? It was calculated, Chinese debt just to pay the interest portion of China’s economic growth will eat up the full value of the new year decline. We believe that the treatment of the debt problem can not be completely from the quantitative analysis.

Observation of Chinese debt problem depends on its nature. The nature of the debt problem is not the quantity of more or less, but in this debt corresponding assets are good assets or bad assets. Debt is used to do? Debt is to support the formation of assets or investments, assets if supported debt as the price itself generated a good asset, is able to obtain a return on investment assets qualified majority of debt is self-liquidating nature, only when you asset itself can not achieve acceptable return on investment, while at the same time this company has a variety of reasons do not quit when the debt has become a problem at this time. Thus, the debt problem reflects assets issue, problem assets reflects too much excess capacity problem.

Normal country there will always be idle assets, the United States an average of 20% of idle assets, excess production capacity during the recession to rise to 25%, reducing to 15% during the boom; this is normal. But if excess capacity is too high, it means that the real economy there are too many companies that belong to zombie companies rely on debt to support its existence, such as a large number of state-owned companies do not make money, a lot of heavy industry, aluminum, steel, shipbuilding, these industries have too much excess capacity, this time the debt became a problem, because you can not afford the corresponding assets to debt servicing. What is the meaning of excess capacity? Is a lot of resources are formulated in the wrong place, excess capacity is the wrong response. The allocation of resources if it is wrong, the growth rate of the economy will slow down.

We studied more than 200 countries around the world in the history of economic growth over the past half-century, the conclusion is: if the allocation of resources in this country is wrong, necessarily implies excess capacity in this country can be high, excess capacity high only about a third of a comparison group of the country’s economic growth.

Excess capacity in these countries high on the financial performance necessarily reflect the proportion of debt skyrocketed, excess capacity in countries with high debt to GDP has risen 84 percent in the past years, the control group rose by only 26%.

China before 2008 the situation is good, excess production capacity is only about 20%, consistent with the global average, 2008 with strong government stimulus policies introduced, excess capacity rates skyrocketed, now around 33%, and rising phase synchronization is debt ratio.

Excess capacity is too high, the debt ratio is too high, resulting in lower return on assets. The high debt ratio and to what extent? China currently is 184 percent debt level, 184 is what level? Than the United States, more than in Europe, surpassing Japan. The United States before the financial crisis in 2007, this parameter is probably around 170. Over the past five years, the United States experienced a painful deleveraging process, several large companies over the past five years, the US bankruptcy than other countries combined have more global, add up the number of US banks bankrupt more than the rest of the world, because experienced such a deleveraging process, the US debt ratio down to 160. Only China, the world’s major economies, which are skyrocketed from our relatively good level of around 110 to more than 184 now.

Such a high proportion of debt as well as a consequence of such a high excess capacity caused a vicious circle of self-reinforcing. There are a lot of excess production in that place, backed by the central government credit as collateral, forcing the financial industry continues to provide a steady stream of financing for these zombie companies in support of their existence, because they refused to quit, so that other business investment rate of return continue to reduce. In the factory this level will find it very difficult to sell the product, capacity is too high, too many competitors, under the pressure to lower prices dumped goods, a lot of business losses, PPI 38 consecutive months of negative; and these losses when companies do not allow bankruptcy, will inevitably lead to a lot of resources are injected into a steady stream of financial operations through various means to zombie companies to go inside, it becomes a vicious cycle.

This cycle is not China a special case in history, there have been, the current path of the debt ratio followed by China with Japan two decades ago is the same as twenty years ago in Japan up to 220 percent debt ratio, flowers a 20-year period is reduced to more than 160 in Japan, but the Japanese economy lost 20 years. At present, China has surpassed Japan to become the world’s highest proportion of national debt. China’s economy is facing a great challenge, the challenge if you do not pay a painful price can not see signs of this cycle is broken, what this painful price? Is the need to have some of backward production capacity out of excess, corresponding, this part of the production corresponding to the required debt losses.

This is China’s economic fundamentals, and in the foreseeable future, it is difficult to see it change.

In this case, we expect the second half of this year China’s economy is "weak and bottom." In the beginning, we forecast CPI around 1.2%, down the growth rate of industrial added value, import growth near zero, the M2 growth rate of 12% or less, about 3% of the PPI, and so on, now, direction on are correct. The good news is that now, it seems the second half of the Chinese economy will not continue to march down the steps, the bad news is that even stabilized, do not see a strong rebound.