China's growth sucks in more debt bucks for less bang

Sat Jul 23, 2016 9:26pm EDT
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By Elias Glenn

BEIJING (Reuters) - As China's economy notches up another quarter of steady growth, the pace of credit creation grows ever more frantic for every extra unit of production, as inefficient state firms swallow an increasing share of lending.

The world's second-largest economy grew 6.7 percent in the first half of the year, unchanged from the first quarter, testament to policymakers' determination to regulate the pace of slowdown after 25 years of breakneck expansion.

Analysts say that determination has come at the cost of a damngerous rise in debt, which is six times less effective at generating growth than a few years ago.

"The amount of debt that China has taken in the last 5-7 years is unprecedented," said Morgan Stanley's head of emerging markets, Ruchir Sharma, at a book launch in Singapore. "No developing country in history has taken on as much debt as China has taken on on a marginal basis."

While Beijing can take comfort that loose money and more deficit spending are averting a more painful slowdown, the rapidly diminishing returns from such stimulus policies, coupled with rising defaults and non-performing loans, are creating what Sharma calls "fertile (ground) for some accident to happen".

From 2003 to 2008, when annual growth averaged more than 11 percent, it took just one yuan of extra credit to generate one yuan of GDP growth, according to Morgan Stanley calculations.

It took two for one from 2009-2010, when Beijing embarked on a massive stimulus program to ward off the effects of the global financial crisis.

The ratio had doubled again to four for one in 2015, and this year it has taken six yuan for every yuan of growth, Morgan Stanley said, twice even the level in the United States during the debt-fueled housing bubble that triggered the global crisis.   Continued...

Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim Kyung-Hoon/File Photo