BEIJING – China’s economic slowdown has been the subject of countless debates, discussions, articles, and analyses. While the proposed remedies vary considerably, there seems to be a broad consensus that the illness is structural. But while structural problems, from diminishing returns to capital to the rise in protectionism since the global economic crisis, are certainly acting as a drag on growth, another factor has gone largely unnoticed: the business cycle.
For decades, China’s economy sustained double-digit GDP growth, seemingly impervious to business cycles. But it wasn’t immune: in fact, the six-year slowdown China experienced after the 1997 Asian financial crisis was a symptom of precisely such a cycle.
Today, China’s business cycle has led to the accumulation of non-performing loans (NPLs) in the corporate sector, just as it did at the turn of the century. While the rate of NPLs is, according to official data, lower than 2%, many economists estimate that it is actually more like 3-5%. If they are right, NPLs could amount to 6-7% of China’s GDP.
Most of this debt is held by state-owned enterprises (SOEs), which account for just one-third of industrial output, yet receive more than half of the credit dispensed by China’s banks. Though the debt-equity ratio of the industrial sector as a whole has declined over the past 15 years, the SOEs’ has increased since the global financial crisis, to an average of 66%, 15 percentage points higher than that of other kinds of firms.