The China Bubble
In China, the Private Sector Watches from the Sidelines

Until very recently, China’s GDP was growing at an average of nearly ten percent a year. But the gains weren’t as broadly-shared as some had thought. The FT:

China’s private sector has missed out on the country’s credit boom over the past eight years, a new study has shown, despite Beijing’s efforts to rebalance the economy away from state-dominated heavy industry.

Private sector debt has fallen from 48 per cent of total assets in 2008 to 35 per cent in 2015, according to economists at Beijing University. Over the same period, state sector debt rose slightly to 53 per cent, even though China’s state-owned enterprises are only two-thirds as profitable as their private sector counterparts.

“Good leverage is decreasing as bad leverage increases,” said Huang Yiping at Beijing University’s National School of Development.

Prof Huang warned that if the trend was not reversed, “financial resources will further flow from high-efficiency parts of the economy to low-efficiency ones, increasing the misallocation of capital, and increasing China’s economic risks”.

Beijing has been trying to trim underperforming SOEs and encourage private investment. But according to Professor Huang, “the state is advancing while the private sector retreats”.

The recent slowdown has discouraged the private sector, but the credit problem seems to be structural and go back further: commissions on loans to SOEs are higher than on loans to private firms, and loans to SOEs are generally considered “state-backed”. As a result, banks are encouraged to loan to state firms at the expense of private ones.

Over the past year, we’ve watched hopes for liberalization fade as Beijing continues to prop up unstable assets with massive stimulus efforts. If this report holds, it suggests that anti-liberalizing forces have been at work in China for much longer than anyone thought—since even before things got really bad and President Xi clamped down.

Western investors can continue to wait on the sidewalk with flowers and boxes of chocolates if they really want to, but China’s economy isn’t going to be released from the IV tubes of the state and allowed to check out of the hospital any time soon.

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