London 31/10/2016 - Corporate debt in China will reach a worryingly high level in the next five years unless the necessary reforms are carried out, Sarah Hewin, chief economist at Standard Chartered Bank, said.
Although China's overall debt is not high and indeed is well below the levels seen in Western countries or Japan, the level of corporate debt is too high, she explained at the LME seminar kickstarting LME Week here on Monday October 31.
Corporate debt stood at 246% of GDP in 2015 and could rise to 330% by 2020 if China were not to implement any reforms, Hewin said. A partial reform would cap corporate debt around 300% of GDP while a swift reform could maintain it below 260%, she argued.
Non-financial institutions' debt levels account for 120% of GDP while the debt of local governments is at 36% and that of central government is at 30%, she noted.
Analysts have for some time pointed to the high level of corporate debt in China as the main reason explaining the lack of metal production cuts in the country - smelters are so indebted that they must keep producing even in oversupplied markets to pay back part of the loans given by local and central governments. This is especially the case in aluminium.
(Editing by Mark Shaw)