China's debt dragon

Post stimulus

A Beijing University academic recently stated that "... public debt could total 50 per cent to 70 per cent of GDP when correctly counted ..."

Exports comprise 40 per cent of China's real economy and that is of real concern for future growth with falling consumer exports.

Near term increase in demand from major importers Europe and America is unlikely, raising concern for resource export-reliant economies.

When stimulus spending terminates in the 2011 first quarter, China's new infrastructure will need to generate record revenues to meet operational and maintenance costs, interest and debt reduction in a slowing economy.

Stimulus termination will seriously cut demand for China's steel, cement, glass, aluminium, copper, plastics and construction industries. The effect will flow on to rail, road and maritime transport as well as coal mining, coke production and power generation. All are major employers and already feeling the effect.

Savings

Confidence in China's perceived economic invulnerability soared in 2009 when Ambassador to the US, Wu Jianmin proclaimed that China's domestic savings totalled US$3.5 trillion, and that this massive source of disposable income would shield China from the serious effects of the GFC, aided by consumer spending incentives in the stimulus package.

Despite glowing state media reports, those incentives failed to deliver. China's property boom drove the appliance subsidy scheme, not the rural sector. A second incentive subsidy scheme widened the scope in an effort to lift consumer spending and reduce the stockpiles of targeted appliances.

For the rural and urban poor, savings represent their only insurance against unemployment, sickness, injury, education and ageing. Savings mean survival, not spending on non-essential items.

Unlocking China's savings will require mammoth social reform spending by Beijing, equalling multiple simultaneous stimulus packages.

Savings at risk

China's US$3.5 trillion savings is the cheap funding pool for state bank lending and crucial for stimulus lending.

Following the money trail may prove interesting when balancing the US$3.5 trillion savings treasure chest with stimulus lending and total debt. Overlay that with the effect of reckless bank lending practices, lack of due diligence, NPLs, AMC failures, and massive questionable securities. There is also the need to factor in the ripple effects of falling property and stock markets.

There is reason for concern over the effect of debt on China's banks and the economy as a whole. What is more alarming and apparently ignored is the potential combined effect on, and reaction by, China's savings depositors.