China Debt & Shadow Banking At A Glance

China’s debt buildup started since the global financial crisis and has reached RMB216 trillion in 2017 with total debt-to-GDP at 256% compared to RMB45 trillion (141% of GDP) a decade ago. This is a 377% increment in debt within 10 years.

Corporate debt accounted for the biggest pie with 63% share.

In terms of the pace of increment, household debt increased the fastest at 7.2 times to RMB41 trillion in 2017, from RMB6 trillion in 2008.

In 2017, ratio of household debt to GDP was at 48% up from 18% in 2008.

In comparison, China’s debt balance is relatively similar with those of the developed economies. Instead, it is the speed of increment that is of concern. The increase in debt-to-GDP ratio for China was 114% between 2008-2017, compared to 15% and 47% rise for US and Japan respectively.

Debt remains an essential tool for financing economic growth, however, to avoid the “Minsky Moment”, China’s challenge will be to contain future debt increases without compromising on economic growth.

2017 Share of Contribution To China’s Total Debt

How Big Is The Mounting Debt?

A Grasp Of The Numbers

300%IMF’s forecast of China’s total debt to GDP by 2022

45 RMB TrillionSize of China’s shadow banking in 2017

55%China’s shadow banking to GDP in 2017

256%China’s total debt to GDP in 2017

83 RMB Trillion

Size of China’s economy in 2017(2nd largest economy in the world)

6.9%China’s annual real GDP growth in 2017

7.1%China average growth rate in last 5 years (2013-2017)

27%Share of China’s contribution to world GDP growth in 2017

60%

0

120%

180%

240%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

256226211195181182178

141

243 255

China’s Total Credit To Non-Financial Sectors % of GDP

Corporate Government Household

Corporate Government Household

90%

0

180%

270%

360%

CN CA EM JN UK AU US DE IN ID

69

249234258

361

193

286256

171124

Debt Comparison % of GDP

Gover

nmen

t

Household Corporate19%

63%18%

Global Economics & Markets Researchwww.uobgroup.com/research

Wednesday, 08 August 2018

Debt Increment Between 2008-2017

HOUS

EHO

LD

▲ 7.2 times to RMB41 trillion

▲ 4.6 times to RMB40 trillion

▲ 4.4 times to RMB135 trillion

GO

VERN

MEN

T

CORP

ORA

TE

Source: CEIC, Macrobond, Bloomberg, FSB, BIS, Media Reports, UOB Global Economics & Markets ResearchDate: 08 August 2018

This publication is strictly for informational purposes only and shall not be transmitted, disclosed, copied or relied upon by any person for whatever purpose, and is also not intended for distribution to, or use by, any person in any country where such distribution or use would be contrary to its laws or regulations. This publication is not an offer, recommendation, solicitation or advice to buy or sell any investment product/securities/instruments. Nothing in this publication constitutes accounting, legal, regulatory, tax, financial or other advice. Please consult your own professional advisors about the suitability of any investment product/securities/ instruments for your investment objectives, financial situation and particular needs.

The information contained in this publication is based on certain assumptions and analysis of publicly available information and reflects prevailing conditions as of the date of the publication. Any opinions, projections and other forward-looking statements regarding future events or performance of, including but not limited to, countries, markets or companies are not necessarily indicative of, and may differ from actual events or results. The views expressed within this publication are solely those of the author’s and are independent of the actual trading positions of United Overseas Bank Limited, its subsidiaries, affiliates, directors, officers and employees (“UOB Group”). Views expressed reflect the author’s judgment as at the date of this publication and are subject to change.

UOB Group may have positions or other interests in, and may effect transactions in the securities/instruments mentioned in the publication. UOB Group may have also issued other reports, publications or documents expressing views which are different from those stated in this publication. Although every reasonable care has been taken to ensure the accuracy, completeness and objectivity of the information contained in this publication, UOB Group makes no representation or warranty, whether express or implied, as to its accuracy, completeness and objectivity and accept no responsibility or liability relating to any losses or damages howsoever suffered by any person arising from any reliance on the views expressed or information in this publication.

There is no single agreed definition for shadow banking. PBoC’s Financial Stability Report (2013) defines shadow banking as “credit intermediation involving entities and activities outside the regular banking system with the functions of liquidity and credit transformation, which could potentially cause systemic risks or regulatory arbitrage.”

There is a range of estimates for the size of shadow banking in China. Based on UOB’s estimation, shadow financing in China soared 65% to RMB45 trillion (55% of GDP) in 2017 from RMB28 trillion in 2013 (46% of GDP).

Most shadow financing in China took place through entrusted & trust loan and wealth management product (WMP). Banks market these high interest rate products as an alternative to traditional savings accounts. Investment in WMPs accelerated 229% to RMB12.5 trillion in 2017 from RMB3.8 trillion in 2013.

China has been attempting to curb shadow banking with tighter regulations and in April 2018, PBoC said the government will set up a statistics platform that will measure all financial activities, from leveraged securities investment to local government borrowing. The move is part of the government’s campaign to clean up its unruly shadow banking and control financial risk.

We expect shadow banking activities to moderate as the government continues to keep track and tighten regulations.

In 2017, the outstanding value of WMPs issued by banks was RMB29.5 trillion, of which joint-stock and SOE banks accounted for 74% share.

What About The Shadow Banking Impact?

Entrusted Loan

Informal Lending

Trust Loan

P2P Loan

Banker’s Acceptance Bill

Trust Investment In Bond

WMP In Bond Markets

30.8%

4.0% 1.

8%

18.8%

45RMB Trillion

27.4%

7.5%

9.8%

Composition of Shadow Financing In 2017

Entrusted Loan

WMP In Bond Market

Trust Loan

Banker’s Acceptance Bill

Informal Lending

Trust Investment In Bond Market

P2P Loans

Breakdown Of Shadow FinancingRMB Trillion

2017

14.07.2

3.8

4.8

6.9

0.7

12.5

8.5

4.4

3.4

1.8

0.8 2013

% Share Of Outstanding WMP By Bank Type In 2017

Agriculture Banks

Others

Foreign Banks

City Commercial

Banks

Joint-Stock Banks

16.0% 5.3%

40.5%

RMB29.5 trillion

1.3%

3.2%

SOEBanks

33.8%

Simplified Lending Cycle Of A Wealth Management Product

Investors Bank

Trust Company

Company

WMP

Invest money via a bank...

...in a wealth management

product

or deposits that money at a bank

which turns around and

invests it

The funds get transferred to a trust company

the trust lends the money out to a company