When it comes to analyzing China's economy, few topics polarize views like the nation's debt levels.
By some accounts, borrowing is out of control and has the country teetering on the edge of a crisis. Others point to the nation's long list of assets, which can more than offset any funding crunch. An example of the opposing views was on display when two separate April 5 research reports each cited the risk of a "Minsky moment" (a collapse in asset prices following the exhaustion of credit expansion) but both came to very different conclusions.
Analysis by Jonathan Anderson published in Gavekal's China Economic Quarterly said it all in the headline: "China's Impending Minsky Moment." Mizuho Securities Asia Ltd. economists led by Shen Jianguang argue that sky-high savings rates, potential to develop its capital markets, low levels of foreign debt and record of solving past crises mean the nation can avoid a Minsky moment.
But to escape a crunch, the government needs to push through painful structural reforms, improve financial market regulation and get a grip on contagion risk, according to Mizuho. That means measures such as keeping the yuan stable, heading off a real estate bubble and shaking up bloated state-owned enterprises.
Warnings on borrowing are well known after debt ballooned in recent years: ratings firms, the International Monetary Fund, policy makers and analysts all rank debt among the key risks facing the economy.
Standard & Poor’s recently cut the outlook for China’s credit rating to negative from stable, saying the economic rebalancing is likely to proceed more slowly than the ratings firm had expected. Moody’s Investors Service earlier made a similar revision, highlighting surging debt and questioning the government’s ability to enact reforms.
The opposing take by Anderson, principal of economics consultancy, Emerging Advisors Group, states: "The Chinese authorities have given up even trying to get a handle on the country’s spiraling debt problem. This means that a financial crisis and severe growth downturn are likely by 2020," he wrote.
Anderson draws parallels with Japan's debt crisis after the nation's stock market and real estate bubbles burst in the early 1990s, leaving a legacy of soured loans and depressed economic growth. But if anything, China's problem could be even worse. That's because Japan's debt is mostly funded by the central bank, whereas China depends on banks lending off their deposit base.
"Eventually, banks will hit a funding squeeze that will precipitate a financial crisis. On current trends, we put the initial crisis threshold at around five years from now," Anderson wrote. He highlights rapid expansion in bank balance sheets which, at some point, will result in some lenders being unable to fund their assets safely.
On top of this, there's little evidence that the government is showing any appetite to clamp down on leverage, only storing up bigger problems for down the line, Anderson argues. "In short, official China will let the debt bubble inflate. No one wants to bear the cost of turning off the taps."
Whichever side of the debt debate proves correct, for now, there are few indications that borrowing is slowing down as authorities ramp up spending to support growth. That leaves even optimists calling for caution.
"Complacency is not a suitable response to China’s rising debt burden," according to the Mizuho analysts.