Lardy: China's debt not so scary

China expert says picture looks a lot different when numbers broken down

China's growing debt has been making headlines, but Nicholas Lardy, an expert on the Chinese economy, believes it's not so sensational when you break down the numbers.

Lardy, a senior fellow at the Peterson Institute for International Economics, said the debt issue is worrying, but it worries him a lot less than some people.

"I think the aggregate figures on the debt are scary if you take them at face value, but I think you have to disaggregate and look at the components," he told China Daily on Thursday.

The rapid credit growth from Chinese financial institutions last year was due to the dramatic credit growth to households, accounting for almost half of the new loans. It was only 10 percent to 15 percent a decade ago.

That, according to Lardy, is not that bad, because the debt relative to disposable income is 70 percent in China, compared to 120 percent to 130 percent in the United States before the financial crisis, although it has now come down to 100 percent.

The structure of household debt is quite different than in the US. Most of the household debt in China is mortgages, where the loan-to-value ratio is low. "So the risks are quite modest," he said.

In the US, the loan-to-value ratio is 100 percent in many cases, so people just abandon their houses when housing prices plunge, resulting in huge losses for banks. "I think it's extremely unlikely to happen in China," he said.

Lardy noted that the debt to disposable income is going up, but still not in the stratosphere and the debt structure is quite favorable.

On China's high corporate debt compared to most countries, Lardy cited the latest Bank of International Settlements data showing that the ratio of corporate debt to GDP seems to have hit a peak.

That, to Lardy, may suggest that it is moving away from a long period of dramatic rise. He emphasized that it is still a "maybe." He believes that after levelling off for a period, deleverage could follow.

Lardy said most people have not taken this into account but just look at the headline numbers, where the debt to GDP is still going up rapidly. "But a lot of that is because the household sector is becoming more important," he said.

He has seen positive signs, such as the raising of interest rates by China's central bank, a move he believes will send an important signal to corporations borrowing money.

Even for the high corporate debt number, Lardy believes it has to be disaggregated, saying that the debt to equity in the industrial, non-financial corporate sector has been basically flat in the last decade due to investment.

Calling that good news, Lardy said the bad news is that debt to equity by state-owned companies is going up while it is going down significantly for private firms.

"So I think that helps to identify what the real problem in China is. It's not the aggregate growth of debt, it's the growth of debt to state companies that is the most problematic and which needs to be addressed," he said.

The Organization for Economic Cooperation last week issued a report, urging China to address rising levels of corporate debt and step up efforts to retire "zombie" state firms.

The report estimated China's corporate debt at 175 percent of GDP, compared to less than 100 percent at the end of 2008.

chenweihua@chinadailyusa.com