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China's Debt Load Is (Much) Higher Than Previously Thought, Goldman Says


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Mar 25, 2010
China's Debt Load Is (Much) Higher Than Previously Thought, Goldman Says

New credit creation points to an "uncomfortable" trend

Tracy Alloway tracyalloway
June 6, 2016 — 4:28 AM CDT

Casting shadows across the Chinese financial system.

Photographer: Nelson Ching/Bloomberg

Count total social financing (TSF) as another Chinese statistic of increasingly dubious value, according to analysts at Goldman Sachs Group Inc.

With many investors grappling to understand the degree to which China's economic growth has been fueled by debt, efforts to get a grip on measures of new credit creation have gained fresh urgency. To date, many have relied on the TSF invented by the Chinese authorities in 2011 as a way of capturing a larger slice of the country's shadow banking activity, but Goldman analysts led by M.K. Tang cast fresh doubt, in a note published on Wednesday, on the measure's ability to gauge credit creation.

They identify a discrepancy between China's official TSF and Goldman's new proprietary estimates of credit, describing the increasing difference as "an uncomfortable trend that has gotten more discomforting."

Of particular issue is the rise in opaque loans given noises surrounding China's circular financing schemes, which involve banks lending to nonbank financial institutions (NBFIs) as opposed to directly to companies. While this "round-tripping," as Goldman dubs it, does help boost bank profits, it also means more investments on bank balance sheets and more money meandering through the financial system as opposed to moving into the real economy through an increase in M2 money supply.

Source: Goldman
Faced with an increasingly tangled system of financing and a money supply measure that doesn't fully encapsulate new credit creation, the Goldman analysts opt to take a slightly different approach to gauge the strength of China's recent credit boom. They look at the (adjusted) flow of money emanating from households and companies and going into various financial investments.

On that basis, China's credit creation came in at 24.6 trillion yuan ($3.7 trillion) last year—far outstripping the 16 trillion yuan increase in money supply and the 19 trillion yuan of TSF.

Source: Goldman
"Such a scale of deterioration [in China's leverage] certainly increases our concerns about China’s underlying credit problems and sustainability risk," the Goldman analysts conclude. "The possibility that there is such a large amount of shadow lending going on in the system that is not captured in official statistics also points to [a] regulatory gap, and underscores the lack of visibility on where potential financial stress points may lie and how a possible contagion may play out."



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Jan 7, 2011
They are propping up their real estate and stock markets with leveraged cheap crap exports to the USA. Chinese central planning got them into a mess that will take time to unwind. Hopefully it does not unravel in the process because it will take down the rest of Asia with it.