Infrastructure construction plays an important role in the process of China's economic development; it is also well known that the cost of infrastructure construction is always closely related to the scale of national debt. Since then, China's debt problem has always been a focus of the world. It is worth noting that the focus of the world market on China's debt problems mainly lies in the public sector, though now the focus has shifted to the country's private debt, and China's private debt problem has become a new indicator for China's financial health.
Last year, there was an inconspicuous jurisprudence case in Qingdao. Two corporate legal persons signed a blank contract for an acquaintance, yet unexpectedly, the borrower ran away after one year. This kind of risk is quite common in China. The court ruling has caused the guarantors to fall into a huge amount of guaranteed debt, and the number of people and assets involved in such cases has multiplied. In 2015, these two persons signed a blank contract with a guaranteed loan of RMB 100,000 and this turned out to be RMB 4.25 million a year later. Judging from the current public opinion, many of these cases have problems with the quality of trials, and they have to do with complex relationships that protect the banks as well. Taking this case of Qingdao as an example, the first trial was held three times, and the judgment was substantiated. The subpoena was notified in the 6th trial court while in actuality it was the 13th trial court. After the defendant arrived in court, the trial was almost completed, and the evidence was extremely problematic. The signatures and the identity cards were all fake, and it was judged that the bank wins the case and the contract is valid. The result of such a case judgment is obviously not convincing, and ultimately it is the rapid complexification, socialization, public opinion-dominated and even internationalization of the private debt problem.
On July 26, 2018, the Cabinet Office of Japan issued the "World Economic Trends report", analyzing the risks caused by the private debts of major countries to the world economy. From the perspective of the debt-to-GDP ratio, China and Canada have a higher proportion. This report points out that this "should be closely monitored", indicating the high level of alert sign. The Cabinet Office of Japan has calculated the difference between the debt-to-GDP ratio of the private sectors of major countries and the historical long-term trend (such as credit gap). The Bank for International Settlements, which developed this analytical approach, believes that once the debt-to-GDP ratio is more than 9% higher than the historical long-term trend, states that "a warning signal for a possible financial crisis occurring within 3 years". As of July-September 2017, China (16.7%) and Canada (9.6%) had credit gaps of more than 9%. However, due to "measures" to reduce excess debt, the gap between the two countries has declined from their peak in 2016.
The International Monetary Fund (IMF) warned that as of 2016, global debt has expanded to a record US$ 164 trillion, a trend that could make it harder for countries to cope with the next recession or when financing is tightening, or to pay off debts. The IMF's semi-annual financial monitoring report emphasizes that the global public and private sector debt expanded to 225% of global GDP in 2016, especially in the private sector, which is driving debt accumulation. In the growth of global private debt after the global financial crisis, China accounts for nearly three-quarters. According to Citigroup's analysis of the Institute of International Finance's statistics, the global debt scale reached nearly US$ 250 trillion in 2018, the highest level in history, almost three times that of 20 years ago. According to the IMF's forecast, the global GDP in 2018 was about US$ 85 trillion. In other words, the current global debt accounts for 294% of the GDP.
From the perspective of financial risk control, the actual private debt is harder to handle compares with that of the public sector. The Western financial institutions and financial regulatory authorities that have been suffered the financial crises have a deep understanding of this and are therefore more sensitive in this matter. In comparison, China's regulatory agencies are somewhat more careless. For example, the National Bureau of Statistics of China believes that for banks, the risk of residents' overall asset repayment ability is relatively small, and residents can independently repay the banks, therefore this would not cause major impact on the overall operation of the economy. Actual private debt does not pressure on banks but rather, the pressure is on society. It is difficult to achieve orderly management, and it is very prone to the multiplier effect of debt and easy to amplify the debt chain. In addition, private debt is not only personal debt but also the debts of private enterprises, so the increase in private debt will make the ability of the whole society to cope with the financial crisis to drop drastically, making the whole society rather vulnerable.
Final analysis conclusion:
Debt will be an important driving factor for the continued decline or even serious Latin-Americanization of the Chinese economy in the future, especially if it cannot be properly controlled.
