Spotlight
By Venkatesh Raghavan
Investments and components in Chinese debt market
As the foreign investors are taking a close scrutiny on China’s debt situation vis-s-vis the private companies that incurred debt on the grounds of enjoying state backing, the actual debt situation needs to be studied on a component basis, which implies taking into account both domestic debt and foreign debt.
Also read: Investors cry foul as Chinese state unplugs support to defaulting firms
When the focus is on the foreign debt-related issue, the borrowings are from private firms, foreign banks, Chinese firms receiving funds from foreign trading partners and the bonds or securities that are issued by Chinese firms that are either state-owned or private sector ones to overseas investors.
Let’s take the example of a big time Chinese giant, namely Huachen. Vincent Jin who had happened to purchase a AAA rated firm Huachen’s bonds earlier in 2020, expressed umbrage that the company had failed to report its bad financial state well in time as this would have saved him from being troubled with bad investments. Other bond holders too in this firm met with a dead-end situation after Huachen transferred 30% of its stake in the Brilliance China Automotive Holdings Ltd, that is based in Hong Kong, to another of its subsidiary companies. Consequently the investors in the bonds are unable to access or claim the assets.
China’s belt and road initiative that had sent amber lights blinking to neighbouring India, was also a major consumer of state-backed loans in order to achieve its ambitious expansion plans in overseas sites. The plan envisaged heavy investment in infrastructure meaning building of rail, road and sea routes across the continents of Asia, Europe and Africa. The Institute of International Finance disclosed that a total corpus of USD 730 billion has been devoted by the Chinese to overseas investments. The IIF further summarised the debt situation stating that the country’s domestic debt rose astronomically to 335% of its GDP towards the previous quarter of 2020. So far, the nation’s overall debt has been placed at 270.1% by the third quarter of the current year. The figures quoted came from the National Institution of Finance and Development that happens to be China’s think tank.
However, at present, the fastest growing component of China’s overall debt is the national consumer debt. The consumer debt figure turns up with emphasis on mortgage and consumer loans. Whereas, the total debt figures that include the US dollar debt had reached the USD 2.09 trillion mark by the first quarter of the current year. This was according to the report pouring in from China’s State Administration of Foreign Exchange. Dwelling on China’s local state borrowing that have turned into an issue of concern for investors, over the decades, they have been sourced by off balance sheet transactions through the Local Government Financing Vehicles (LGFVs). The cause of worry is that it suffers from weak transparency owing to not being recorded as to how these funds get used. Just like corporate consumers talking about hidden costs, these amount to hidden debts and so far run to the tune of USD 4.2 trillion.
To sum up, the Chinese bond market that has begun to rake up huge debts comprises bonds that come from the stables of the national government, local state governments and private companies. These also include securities that are mortgage-based. Currently it is the third largest bond market in the world and has crossed the USD 13 trillion mark.
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