According to the Wall Street Journal
"Nationwide, four-and-a-half years of breakneck growth in lending has significantly increased China's debt burden. Outstanding borrowing by businesses and households rose to 170% of gross domestic product at the end of 2012 from 117% in 2008, according to data from the Bank for International Settlements. The 2012 figure for the U.S. was 157%.
Assuming interest rates of 6.9% on outstanding credit—the average in June—and repayment over the next decade, interest and principal payments on business and household debt currently absorb around a third of China's GDP. At the end of 2007, on the eve of the financial crisis, the equivalent debt-service ratio for the U.S. was 21%, a figure that was broadly unchanged at the end of 2012, according to the BIS.
Bad debt levels in China's banks are low. A high savings rate means bank deposits continue to accumulate, and a tightly controlled capital account makes it hard for funds to go anywhere else.
Even without a crisis, though, rising costs of repayment still threaten to choke growth, already testing a 20-year low. If money is used to service debt, companies can't invest as much as they otherwise would and local governments might have to limit what they spend on crucial public services. Heavily indebted companies and governments are more likely to default, especially if economic growth continues to slow.
"Nationwide, four-and-a-half years of breakneck growth in lending has significantly increased China's debt burden. Outstanding borrowing by businesses and households rose to 170% of gross domestic product at the end of 2012 from 117% in 2008, according to data from the Bank for International Settlements. The 2012 figure for the U.S. was 157%.
Assuming interest rates of 6.9% on outstanding credit—the average in June—and repayment over the next decade, interest and principal payments on business and household debt currently absorb around a third of China's GDP. At the end of 2007, on the eve of the financial crisis, the equivalent debt-service ratio for the U.S. was 21%, a figure that was broadly unchanged at the end of 2012, according to the BIS.
Bad debt levels in China's banks are low. A high savings rate means bank deposits continue to accumulate, and a tightly controlled capital account makes it hard for funds to go anywhere else.
Even without a crisis, though, rising costs of repayment still threaten to choke growth, already testing a 20-year low. If money is used to service debt, companies can't invest as much as they otherwise would and local governments might have to limit what they spend on crucial public services. Heavily indebted companies and governments are more likely to default, especially if economic growth continues to slow.
A shift to higher interest rates, which could come either in response to an increase in inflation or as regulators liberalize the banking sector, would add to the pressure.
Given existing debt levels, an increase in lending rates of one percentage point would add almost two percentage points of GDP to the annual burden of repayment.
A key fault line is the repayment capacity of China's local governments. Since the 2008 financial crisis, town halls around China have borrowed heavily to pay for a splurge in spending on roads, railway and airports. With many of those projects generating little or no returns in the short term, repayment is a challenge and some local governments are taking on more borrowing to repay existing loans.
In the corporate sector, it is firms in heavy industries , steelmakers like Shougang, aluminum smelters and cement kilns—that have racked up some of the highest debts. Data from FactSet, a provider of financial information, show that net debt for firms in the sector rose to 30 times net earnings in 2012, from 10 times in 2011, as debt continued to mount and profits fell sharply away. Global competitors such as steel firm Arcelor Mittal have substantially lower and more stable debt-to-profit ratios".
