Corporate Debt in the Chinese Stock Market

How levered are Chinese stocks?

January 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • China exhibits the world’s highest corporate debt as % of GDP
  • However, Chinese stocks are not significantly more levered than U.S. stocks
  • Asset and debt growth has stalled in 2018, likely indicating an economic slowdown

INTRODUCTION

The McKinsey Global Institute published an influential study in 2015 on the growth of global debt. The research note revealed that post the global financial crisis, which had its foundation in debt, the world continued to add leverage. China was featured prominently as its debt quadrupled to $28 trillion between 2007 and 2014, which equates to 282% of GDP and is more characteristically of a developed country like the United States.

The Chinese economy is expected to have grown at 6.6% in 2018 according to the IMF while growth is anticipated to slow down to 6.2% in 2019, although some analysts discount both of these numbers substantially. A decline in growth makes debt, which has been fuelling economic growth, a much more dangerous instrument (read Equity Factors & GDP Growth).

Investors were forced to increase their exposure to Chinese stocks in 2018 when MSCI increased the weight of Chinese stocks in its emerging market index, which is tracked by $1.6 trillion of assets. In this short research, we will investigate the corporate leverage of Chinese stocks.

CORPORATE DEBT IN CHINA

The growth of Chinese debt between 2007 and 2014 was split across households, the government, and corporates, although the latter group showed the strongest increase by growing its debt by 52%. This trend continued and China has become the country with the highest amount of corporate debt as a percentage of GDP as of 2017.

The corporate leverage is higher than in developed and certainly higher than in emerging markets. Corporates in emerging markets are typically unable to reach such high levels of indebtedness as lenders, especially international investors, are wary of providing too much debt given regular economic boom-and-bust cycles. However, China has shown remarkable consistency in economic growth and credit is mainly supplied by domestic banks, which are effectively controlled by