Lower GDP hurts paying back debts - Victor Shih

Victor Shih

China´s GDP dropped to 6.4% and while many countries would be happy with such a growth, it creates a major problems for China, as current debts cannot be served, warns financial expert Victor Shih in Bloomberg.

Bloomberg:

While in yuan terms the slowdown is more gradual, the decline in nominal GDP gains is still dramatic -- to a 6.4 percent pace at the end of 2015 compared with 10.1 percent back in 2013 and in excess of 18 percent in 2010 and 2011. The slide highlights the need to follow through on slashing excess industrial capacity, eliminating unprofitable enterprises and revving up new drivers of expansion. 

"The biggest problem with plunging nominal GDP growth is that the cash-flow growth to the corporate sector has declined at a time when growth in its debt servicing has accelerated," said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. "Because debt is so much larger than the economy, debt servicing each year will still be two to three times the incremental growth of nominal GDP." 

China’s debt-to-GDP ratio surged to 247 percent last year from 166 percent in 2007, propelled by a lending binge in the aftermath of the global financial crisis. Days before the National People’s Congress, the central bank this week lowered the ratio of deposits major banks must hold in reserve, letting them deploy more in lending.

More at Bloomberg.

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