New | The US$26 trillion debt problem that is crushing competitiveness in China
It could take a decade for the mainland to get on top of the debt crushing its competitiveness, and slower economic growth only makes it harder
China owes its stock market boom and bust to the one thing that is crushing the competitiveness of every part of the world's second biggest economy - debt.
The nation's debt mountain is widely estimated to top 250 per cent of gross domestic product, roughly equivalent to US$26 trillion, and is unlikely to peak before 2018.
Its rate of growth since the start of the global financial crisis in 2007 has been exceeded only by the euro zone countries that have required international bailouts to stave off bankruptcy.
The mainland corporate sector is among the most indebted in the world and the drag on economic activity is made worse because most has been accumulated by state-owned enterprises that deliver a shrinking share of economic growth.
The good news is that most of the debt is denominated in yuan, which helps insulate Beijing's US$3.7 trillion foreign reserves pile, and almost all the debt has been borrowed by, or is owed to, entities ultimately backed and owned by the government.
The overarching bad news, however, is that cost of servicing the debt and the country's dependence on credit to drive the economy has become so acute that it now takes non-financial businesses around 1.6 units of leverage to deliver a one unit increase in GDP growth.
"True, most of China's debt is owned by domestic investors and China has a huge foreign exchange reserve cushion, but it affects balance sheets, raises risk profiles and affects the application of economic policies," Paul Markowski, president of New York-based Falconridge/MES Advisers, told the .
