China's stock market gains have led to record share issuance this year. Up to May 14th share sales reached 252 billion RMB for the year.
With a 125% of GDP debt burden, business enterprises in china are the main culprits of the country's debt problems. Household debt and government debt are modest by global comparisons. Debt overhang is a significant burden for corporations in China.
There has been talk that record share issuance will help with the debt burden. Some market commentators have concluded that sales of new shares are helping companies cut debt levels. That is in fact true, but here are the numbers:
New share issuance to May 14th raised 252 billion RMB. If that pace continues, the 2015 total will be 680 billion.
If we use McKinsey Global Institute's total debt to gdp number of 217%, then at current trends 2015 year end debt to GDP in China will probably be 226% (assuming debt growth of 13% and nominal GDP growth of 8.5%).
If all new share sale cash goes to pay down debt and we deduct 680 billion from total debt this year, debt to GDP will be 225% by the end of 2015. So, share issuance at a record pace has the ability to reduce China's total debt load from 226% of gdp to 225%. Lower, yes. Meaningful, probably not.
With credit growth still outpacing nominal GDP growth and assuming PBOC efforts to boost credit this year are successful, the only way China's debt burden (as a % of its economy) will be reduced is through defaults of non-systemically important inefficient debt burdened firms.
Beijing has been preparing for potential financial system turmoil for years. The PBOC has created new lending facilities to help banks cope with turmoil. Deposit insurance was rolled-out in May. Banks have 18.5% of deposits in reserves. Most debt is held domestically, and a significant amount of it between state owned firms and state owned banks. The central government has a very low debt burden (22% of GDP) and vast resources (potentially 350% of GDP).
Expect more corporate defaults by non-systemically important firms going forward without significant risk to the financial system as a whole, and view most of those defaults as a good thing for structural change in China.