China: Spending Too Much

March 13, 2014
Credit and spending problems in China suggest that its economy will be less vibrant in the years to come. Be careful of your investments and of the growth projections.

The US government is not the only place where too much spending could bring about a financial reckoning.  China is facing some credit and spending problems that may threaten the nation’s health, though not immediately.

Government leaders have talked over the last year or more about reigning in spending by tightening up on credit standards and slowing growth in corporate debt, both in the banks and in the shadow debt market.  I applaud this move as a necessary structural reform that would work to China’s long-term good, even at the risk of a slower rate of growth.  China’s leaders, however, have recently signaled that they may loosen up on credit in order to help spur growth.  Loosening credit now would likely help through the near-term but would create greater problems in the intermediate and long run.  Credit easing is most likely being undertaken in a move to stave off higher unemployment, corporate failures, and aggravating social tensions.

The government will also be spurring the economy through public spending by 9% from last year, according to the National People’s Congress.  There will be an unhealthy emphasis on more public housing.  The fiscal deficit is likely to rise to 12% or more this year, a mere drop in the bucket by US standards, but a sure sign that the Chinese are spending more money than they have.

Loosening the reins on credit is also aimed at helping companies that are on the edge of collapse, partially as a result of too much debt and razor thin margins.  A third of the 4.6 trillion Yuan trust loans are scheduled to mature in 2014.  Think of what that would mean in the US if a third of corporate bonds were due this year and the markets were unsure if these firms were still truly viable.  A significant problem would develop in the States.  However, we are talking about China and state-controlled banks. The problem will be masked, a crisis will not occur, but the problem will remain because apparently corporations have also spent too much money.

Local governments have lent money for many underperforming and non-performing local projects (think empty shopping malls or ghost cities).  The Chinese National Audit Office is reporting that nearly 67% of the debt held by these local governments is coming due this year.  This could get really expensive really fast if these loans become non-performing and Beijing must bail them out.

Lastly, at a time when a little fiscal restraint would go a long way, China’s Ministry of Finance is reporting that military spending will increase by more than 12% in 2014.  This is a large increase, and one that they can ill afford, unless you have a potential use for those military assets.

None of this is likely to cause China’s economy to tank, but it does suggest that this economy will be less vibrant in the years to come.  Be careful of your investments and of the growth projections.    

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