On January 18, 2018, China’s National Bureau of Statistics announced that the country’s GDP grew by 6.9 percent in 2017:
According to the preliminary estimation, the gross domestic product (GDP) of China was 82,712.2 billion yuan in 2017, an increase of 6.9 percent at constant price compared with last year. Specifically, the year-on-year growth of GDP for the first quarter was 6.9 percent, 6.9 percent for the second quarter, 6.8 percent for the third quarter, and 6.8 percent for the fourth quarter.
A day earlier, the People’s Bank of China (PBoC) announced that total social financing (TSF) in 2017 had increased to 19.44 trillion renminbi. The PBoC press release stated:
According to preliminary statistics, the aggregate financing to the real economy (AFRE) . . . was RMB 19.44 trillion in 2017 . . . Specifically, RMB loans to real economy registered an increase of RMB 13.84 trillion . . . foreign currency-denominated loans (RMB equivalent) . . . recorded an increase of RMB 1.8 billion . . . entrusted loans registered an increase of RMB 777 billion . . . trust loans registered an increase of RMB 2.26 trillion . . . undiscounted bankers’ acceptances recorded an increase of RMB 536.4 billion . . . net financing of corporate bonds stood at RMB 449.5 billion . . . equity financing on the domestic stock market by non-financial enterprises registered RMB 873.4 billion . . .
For those keeping track, the table below lists the relevant GDP and TSF data for the past four years:
I was recently part of a discussion on a listserv that brings together Chinese and foreign experts to exchange views on China-related topics. What set off this discussion was a claim that the Chinese economy began to take deleveraging seriously in 2017. Everyone agreed that debt in China is still growing far too quickly relative to the country’s debt-servicing capacity, but the pace of credit growth seems to have declined in 2017, even as real GDP growth held steady and, more importantly, nominal GDP growth increased.
I was far more skeptical than some others about how to interpret this data. It is not just the quality of data collection that worries me, but, more importantly, the prevalence in China of systemic biases in the way the data is collected. Not all debt is included in TSF figures. The table above, for example, indicates a fall in TSF in 2015, but this did not occur because China’s outstanding credit declined.
It occurred rather because in 2015 there was a series of debt transactions (mainly provincial bond swaps aimed at reducing debt-servicing costs and extending maturities) that extinguished debt that had been included in the TSF category and replaced it with debt not included in TSF. The numbers are large. According to the China Daily, there were 3.2 trillion renminbi worth of bond swaps in 2015, plus an additional 600 billion renminbi of new bonds issued. If we adjust TSF by adding these back, rather than indicate a decline of 6.4 percent, we would have recorded an increase of 15.7 percent.1
Credit Growth Can Embed Systemic Biases
Most analysts were already aware of the impact of provincial bond swaps on TSF and duly adjusted their data; but this suggests a wider problem, which is what I wrote about in my first contribution to the listserv discussion. I proposed two reasons why I am not convinced that observers have seen the beginning of any meaningful deleveraging.
The first has to do with systemic biases in the way credit is structured and counted. Chinese bankers—like those in the rest of the world, no doubt—have always gamed regulatory constraints when it comes to credit creation. Like bankers everywhere, they respond to institutional incentives by altering the ways in which they structure credit creation. These changes often have been driven as much by Chinese bankers’ need to please a varied group of regulators—whose own institutional biases are exacerbated by the competition, and even hostility, that exists among them—as by economic and financial factors.2
That is why it is wise to be especially skeptical about recent evidence that Chinese banks have begun to take deleveraging seriously. Beijing has been worried about China’s growing debt burden since at least 2012. But in 2017, this issue has become almost an obsession in some quarters. Beijing has made a series of aggressive announcements in the past year testifying to this surge in concern, culminating in an October 2017 statement by PBoC Governor Zhou Xiaochuan, who warned that China could face its own “Minsky moment.”
Under these circumstances, then, it was always to be expected that banks would take greater pains than ever either to rein in credit growth or, if that was too difficult, to structure credit in ways that seemed to comply with regulatory concerns. One way of doing so is to push credit creation off balance sheets and into forms that are less likely to trigger regulatory reprisals. That Chinese bankers might be doing so is confirmed by both anecdotal and official evidence indicating faster-than-expected credit growth in categories that fall outside widely watched measures like TSF. The point is that the deceleration in credit growth implied by TSF data might indeed reflect the beginning of Chinese deleveraging, but it could also reflect the surge in regulatory concern. In the latter case, this would mean that China has experienced not the beginnings of deleveraging, but rather a continuation of the trans-leveraging observers have seen before. I will discuss some of the most obvious examples of how this may be occurring later in this essay.
GDP Growth No Proxy for Growth in Debt-Servicing Capacity
My second reason for skepticism is one I have written about elsewhere, in both a November 2017
Financial Times article and a September 2017 blog entry. When one compares credit growth to growth in debt-servicing capacity, not only is it uncertain how quickly credit is growing in China but, more importantly, it is even less certain how quickly the country’s debt-servicing capacity is growing.
The standard proxy for growth in debt-servicing capacity is GDP growth, but this is only valid in economies in which GDP growth data is a systems output that measures the underlying performance of the economy. But this is not true of China, as I explained in the Financial Times article:
Typically, analysts assume that changes in reported GDP reflect movements in living standards and productive capacity. In China, however, this is not the case. Local governments are expected to boost spending by whatever amount is needed to meet the country’s targets, whether or not it is productive. [In China] GDP growth is not the same as economic growth.
In my email, I went on to discuss why this matters so much and why it is incorrect to think of China’s GDP growth as growth in China’s underlying economy (or in its debt-servicing capacity, or its productive capacity, or however else one prefers to think of GDP). GDP growth measures the increase in economic activity, whether that activity is building bridges to Brooklyn or bridges to nowhere. It does not directly measure the increase in economic value-creation, as observers usually assume it does. It is only because in most economies there are constraints on the ability to fund nonproductive activity that observers generally ignore the difference between economic activity and value creation.
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