July 24, 2021

Chinese economy intoxicated with credit

He wanted to impress, Jia Yueting. Smartphones, high-definition televisions, virtual reality headsets, music streaming, television series, bicycles and electric vehicles … They were going to see, these American tech giants, what the red billionaires had in their stomachs. Just a year ago, in San Francisco, in front of the gratin of Silicon Valley, the founder of LeEco, one of the most promising Chinese start-ups in recent years, announced with fanfare his arrival in the United States.

In the process, he spent $ 250 million to buy 20 hectares of land on the heights of Santa Clara in order to build a gigantic campus that can accommodate nearly 12,000 employees. To finance his ambitions, the young Beijing tycoon simply borrowed 6 billion dollars in 2016 alone. Problem, he has never repaid a single penny to his bankers.

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As the company flirts with bankruptcy today, the Shanghai High People’s Court has just frozen $ 182 million of its personal assets. Reason: too much debt. In this China with disproportionate economic ambitions, Jia Yueting is far from being an isolated case. At the beginning of the summer, it is the richest man in China, Wang Jianlin, the founder of Wanda, a conglomerate present in tourism, hotels, cinema and football with Atlético Madrid, who was forced to panic part of his real estate empire after the banks cut off part of his credit lines. Again: too much debt, too fast.

A worrying over-indebtedness

Source: FMI.

Source: FMI.


At the beginning of October, in its report on the financial stability of the planet, the IMF pulled out of its reserve, shooting red balls on this China sitting on a mountain of credits. Chinese history, however, has nothing to do with the Greek and Spanish psychodramas of the beginning of the decade, where it was the states that played the cicadas. There, it is the companies which are gorged with debt.

“Beijing drugged its economy with credit”

The statistics are cruel: the indebtedness of non-financial corporations reached 165% of gross domestic product (GDP) at the end of 2016 in China, against 92% in Japan, 72% in the United States and France, or 44% in the United States. Brazil … “Never in economic history has a country found itself in such a situation,” worries Christopher Balding, professor at HSBC Business School in Shenzhen.

A mad race that began in 2008, when the financial world was on the verge of suffocation. Beijing then orders the state banks to open wide the floodgates of credit with one objective: to finance all that is possible, even if it means keeping old zombie industrial conglomerates under oxygen. Even if it means creating gigantic overcapacity in steel, construction, railway installations, photovoltaics or shopping centers …

Everything to avoid a too marked slowdown in growth likely to increase unemployment and threaten social peace. A strategy that has worked wonderfully. The Chinese locomotive slowed down but did not stall. “Beijing drugged its economy with credit,” describes economist Jean-Luc Buchalet, author of Capitalism and the Seven Deadly Sins (Plon). To create an additional growth point, China must indeed create 2.7 times more debt than ten years ago.

For a good year, Xi Jinping, the Chinese president, has tried to reduce the flow of the tap, especially for large private groups which had embarked on a wild race to acquire abroad. Except that new players have entered the dance, taking over from traditional banks: credit platforms, trusts, opaque intermediaries, escaping any regulation, who have made their money out of this insatiable need for new money.

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Shadow finance that has prospered legally. The Meccano is well oiled: companies or local authorities in need of funds turn to these platforms which grant them loans without too much eyebrow. The latter find the money by creating financial products that they sell to other investors or to very wealthy households by promising them a return of between 8 and 10% per year.

“The creativity of Chinese finance is limitless”

As the Chinese are the biggest savers on the planet and the investments offered by state banks only bring in peanuts, millions of households have flocked to these lucrative financial gadgets. Without ever knowing what was inside. “The creativity of Chinese finance is limitless,” admits Yuan Ding, economist and vice-president of China Europe International Business School in Shanghai.

To clean up their balance sheets, the banks even sold the “rotten” loans that they had granted to these platforms, which they sliced ​​and “repackaged” in these amazing financial investments. The rating agency Moody’s estimates that the weight of shadow finance has tripled over the past five years, to represent at the end of 2016 some 65 trillion yuan – the equivalent of 8 trillion euros -, or 87% of Chinese GDP.

“The Beijing authorities are aware of the risks associated with the accumulation of debt. Except that they are sailing on sight. If they regulate too much, growth is likely to stall; if they continue to turn a blind eye, the situation will become explosive.” , acknowledges Jinyue Dong, economist at BBVA in Hong Kong. At the start of the year, a new president was appointed to the Chinese banking regulatory commission, the finance gendarme.

Risks of spread?

It’s the Wild West, Guo Shuqing said at his first press conference, during which he announced a real clean hands operation. She made her first victims. A handful of financiers are already behind bars, and Xiang Junbo, the insurance regulator, has been dismissed from his post and is under investigation by the Communist Party’s Central Commission for Discipline Inspection.

In the event of cascading bankruptcies, can Chinese over-indebtedness shake the planet? “We look at the problem through the eyes of Westerners accustomed to market economies dependent on each other.

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In reality, the debt is held almost exclusively by the Chinese, the banks are in the hands of the State, and the yuan, the country’s currency, is completely managed, ”explains Jean-François DiMeglio, the president of Asia Center. If a problem arose, it would therefore remain Chinese. And too bad if millions of savers are ruined. “Beijing, with its $ 3 trillion in accumulated foreign exchange reserves, has the financial means to put out a fire, even if it is spreading, “adds Jean-François DiMeglio. Reelected for five years at the head of the country, the authoritarian Xi Jinping can continue to play the one-armed bandit for a long time to come …



Frédéric Filloux is a columnist for L'Express and editor of the Monday Note.Frederic Filloux


Pierre Assouline, journalist, writer, member of the Académie Goncourt and columnist for L'Express.Pierre Assouline


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