The first step is admitting you have a problem. If this familiar therapeutic imperative is correct, China may be on the path to salvation. Over the weekend Zhou Xiaochuan, governor of the People’s Bank of China, became the latest official to proclaim that China has a debt problem. China’s debt to gross domestic product ratio is running as high as 230 per cent, on Financial Times estimates (Greece, by comparison, is running at 200 per cent). Mr Zhou’s observation that corporate debt is “on the high side” is a heroic understatement.
One solution Mr Zhou proffered is to develop “robust capital markets” to enable increased equity financing. That is not too dissimilar from a suggestion made by the head of the China Banking Regulatory Commission last Friday: that China might experiment with debt to equity swaps. Doing so would allow aggregate debt to fall, but only by redistributing dead capital.
Such measures will look less far-fetched if equity markets can be revived. Yesterday, shares in Hong Kong and China-listed brokerages jumped between 7 and 10 per cent on reports that the China Securities Finance Corp will restart loans to securities firms. The money can be lent in turn to investors as margin finance.
