China is taking on more debt, but the real concern is the rate at which its companies are borrowing. Since 2008, non-financial sector debt-to-GDP has risen at breakneck speed. Encouraged by government calls to support economic growth, companies gorged on cheap credit. Analysts estimate that two-thirds of corporate debt is in the hands of China's sprawling state-owned enterprises, many of which are unprofitable and inefficient.
As borrowing increases and earnings flatline, many more Chinese companies are struggling to keep up with their repayments. A snapshot of Chinese corporate debt compared to earnings, as represented by a group of 1189 mid- to large-cap companies who reported net debt in 2008 and 2016, paints a bleak picture. The chart below analyses net debt/EBITDA, a ratio used to show how many years it would take for a company to pay back its debt if current metrics remained constant. The number of companies with a ratio between 0 and 5, a measure usually considered healthy, has fallen by 31.7%. The number of companies making a loss or companies with an unhealthy ratio above 5 has risen.
Number of companies
Listed in Hong Kong
Chinese companies listed in Hong Kong are generally considered to be among China's healthiest due to greater financial disclosure rules. The chart below looks at a group of 93 companies with listings dating back to 2011.
By December 2016, the number of companies with earnings at least three times the interest cover on their debt, a measure generally considered to be healthy, shrank from 66 to 49.
Why did China get into a debt problem? Figures show that China's over-borrowing of the public and corporate sector can basically be traced back to the huge stimulus package and lax monetary policy that Chinese economic authorities introduced during the global financial crisis in 2008-2009.
China's debt is nearly 44% of its GDP and its local governments owe nearly $5.14 trillion. With the economic slowdown and collapse of land sales revenue, provinces and local governments in China are facing an embarrassing situation.
Three years of strict pandemic controls in China and a real estate crash have drained local government coffers, leaving authorities across the country struggling with mountains of debt. The problem has gotten so extreme that some cities are now unable to provide basic services, and the risk of default is rising.
At the end of 2021, of the 98 countries for whom data was available, Pakistan ($27.4 billion of external debt to China), Angola (22.0 billion), Ethiopia (7.4 billion), Kenya (7.4 billion) and Sri Lanka (7.2 billion) held the biggest debts to China.
China's debt overhang far exceeds the burdens facing the United States. As recently as 2020, total debt in the United States relative to GDP exceeded China's. But as of mid-2022, China's relative debt burden stood 40 percent higher than America's.
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