WEALTH MANAGEMENT | Staff Reporter, China

Here's how alarming China's rising indebtedness is

Its non-financial sector debt is at a whopping RMB 107.9t.

According to BBVA Research, China’s rising indebtedness has attracted increasing attention, especially after the credit binge associated with the massive stimulus package of 2009-2010

BBVA Research estimates that China’s total non-financial sector debt amounted to 208% of GDP (RMB 107.9 trillion) as of end-2012. (Our estimates of total debt are broadly in line with official and market figures, which typically range from 200-220%.)

Here's more:

Debt of the household and non-financial corporate sector amounted to 155% of GDP (RMB 80.7 trillion), almost all of which is domestic, while debt of the central and local governments amounted to 57% of GDP.

Within the overall debt burden, obligations of the corporate sector have become a particular source of concern, both for their relative size and for the pace at which they have accumulated.

China’s corporate debt level is extremely high by international standards (127% of GDP compared to an average of 70% for other emerging markets), and has grown rapidly in recent years (31 percentage points of GDP since end-2008).

The source of China’s elevated corporate debt stems from high investment rates, exacerbated by thegovernment-led 2009-10 stimulus package.

Much of the government-led stimulus package was carried out through the banking system, which led to easy credit and a lending boom. The stimulus package also encouraged firms to expand their production capacity, much of which was debt-financed.

Signs of financial stress can be found in an analysis of debt data for domestically listed companies

In particular, one-quarter of the enterprises in our sample of listed companies have insufficient cash flow from business operations to meet their interest obligations.

Not surprisingly, industries with excess capacity appear most debt-ridden, including manufacturers of metals, machinery, and chemicals.

Even if debt-servicing issues are resolved (see below), the debt overhang may constrain future investment and growth.

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