In the six years since LINKS first covered risks of excessive leverage in the Chinese economy, both understanding of and dealing with leverage has been a key focus for the government of China. Despite this focus and even though the debt is domestically funded, the results of deleveraging are less than encouraging. Sustainability of this debt is further away, which has major consequences for global investment portfolios.
In 2012 LINKS Analytics wrote about the looming debt crisis in China (Global Systemic Risks, 2012). At that time, we estimated the size of the local government finance vehicle (LGFV) debt at $4.2 trillion, or nearly double the size of Moody’s estimate. The conclusion was that the size of this debt was too large to grow out of (as China had previously done).
Through the following six years China’s policy makers continued to balance the demands of managing the mounting debt on one hand and delivering the economic growth on the other. China’s economy did not implode under the debt burden but judging by the now widespread recognition of the problem, the debt issue did not go away.
We believe It is now time to revisit the issue of systemic risks posed by China’s economy, focusing specifically on the following questions:
- Is China still inefficient and is debt still accumulating?
- If so, is it more or less sustainable in 2019 compared to 2012?
- What are, if any, signs of imminent distress?
- What would be the impact on balanced portfolios in case of an economic collapse?
To answer the last question, we use scenarios in LINKS Mira Agent-Based Model (ABM), which enables assessment of system-wide impact of scenarios on investment portfolios.