China: Credit demand and capital flight

China: Credit demand and capital flight

China: Credit demand and capital flight

Asia Pacific Economic Outlook, August 2014

As the Chinese economy slows and the government cracks down on corruption, the demand for credit has not abated. Affluent Chinese are also becoming concerned about the safety of their assets.


For a long time (28 months to be precise), producer prices in China have been falling, partly reflecting excess capacity as well as slowing economic growth. Recently, the government reported that producer prices continued to fall in June, but at the slowest pace in more than two years. Producer prices were down 1.1 percent from a year earlier. Meanwhile, consumer prices were up a modest 2.3 percent. This news is consistent with data showing the stabilization of manufacturing activity in China. A recent purchasing manager’s index moved into positive territory for the first time this year, suggesting that the manufacturing sector has finally stabilized after a period of contraction. This may reflect the impact of the “mini-stimulus” engineered by the government, which involves accelerated spending on infrastructure. In any event, the economy appears to be settling into a new, yet lower, rate of growth.


As the Chinese government cracks down on shadow banking, the demand for credit has not abated. Bloomberg reports that corporate bond issuance, which is outside the shadow banking system, increased 54 percent in the second quarter from a year earlier.1 Bond yields have fallen, suggesting that the government has been complicit in the expansion of credit. Moreover, despite government statements that it will focus on financial reform even at the cost of slower growth, it appears that the government is keen to keep growth going, even if it means a rapid expansion in credit. Indeed, Chinese companies now have more debt than US companies. Much of the expanded bond supply has come from large state-run companies, many of which already have excess productive capacity. This raises the questions of how sustainable this situation is and whether continued credit expansion sets the stage for trouble in the near future. In any event, the government is clearly concerned by the slowdown in growth and is willing to allow more debt-financed investment in order to sustain growth. Yet this is hardly a good long-term solution to China’s problem.

Standard & Poor’s (S&P) reports that, for the first time, the volume of corporate debt in China exceeds that of the United States. Chinese corporations owe $14.2 trillion, compared with US corporate debt of $13.1 trillion.2 As a share of GDP, China’s figure is far higher than that of the United States. S&P reports that one-third of Chinese corporate debt is financed through China’s shadow banking system, which is seen as being at risk. In a report, S&P said, “This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China’s informal banking sector. With China’s economy likely to grow at a nominal rate of 10 percent per year over the next five years, this amount can only increase.”3 S&P said that the sectors of most concern are property and heavy industry. Both are characterized by excess capacity and, in the case of heavy industry, declining prices. Prices in the property market are at risk of declining.

Growth of local government debt in China decelerated in June. The National Audit Office said that the debt of nine provinces and nine cities had increased 3.8 percent in the first half of 2014 versus a year earlier.4 This was down from growth of 7.0 percent in 2013. This is good news following blistering growth of local debt in the past several years. Such growth created huge financial risks for local governments, which borrowed to fund infrastructure investments, and for the financial institutions that bankrolled them. The slowdown likely reflects the efforts of the central government to slow the pace of borrowing by local governments. While positive in terms of its impact on financial risk, it probably explains some of the slowdown in economic growth.

Capital flight

As the Chinese economy slows and the government cracks down on corruption, many affluent Chinese are becoming concerned about the safety of their assets. This includes Hong Kong Chinese as well given the recent concerns about mainland interference in the affairs of the territory. Consequently, it is not entirely surprising that the purchase of US property by Chinese is on the rise. The National Association of Realtors (a US organization) reports that, in the year ending March 2014, purchasers from China, Hong Kong, and Taiwan spent $22 billion on residential property in the United States.5 This was up 72 percent from the prior year. Chinese accounted for one-quarter of all foreign purchases of homes in the United States. While the median sales price of homes in the United States is $199,575, the median price paid by Chinese is $523,148.6

Chinese accounted for one-quarter of all foreign purchases of homes in the United States.

A disproportionate share of the purchases took place in California, especially Southern California. According to the California Association of Realtors, 69 percent of Chinese purchases were made in cash.7 About 20 percent of the purchases were made by absentee owners who do not yet have long-term visas to stay in the United States. Many purchase the homes so that their children can attend high school or university in the United States. In those communities where Chinese are active, prices have risen considerably. In China there are strict capital controls limiting the amount of money that people can take out of the country. Evidently the affluent are getting around this, allegedly by faking invoices for imports. While this trend is obviously important for Southern California, the larger significance is the fact that so many affluent Chinese are eager to get their money out of China.


View all endnotes
  1. Bloomberg, “Record bond sales show Li focused on GDP over debt: China credit,” July 2, 2014,
  2. Sarah Gordon, “China overtakes US in company debt issued,” Financial Times, June 16, 2014,
  3. Ibid.
  4. Bloomberg, “China local debt growth slows as economic expansion cools,” June 25, 2014,
  5. National Association of Realtors, “International home buyers continue to invest in profitable U.S. market, realtors report,” July 8, 2014,
  6. John Gittelsohn, “Chinese cash-bearing buyers drive U.S. foreign sales jump,” Bloomberg, July 9, 2014,
  7. California Association of Realtors, Understanding the international real estate buyer, 2013,


Dr. Ira Kalish

Dr. Ira Kalish is chief global  economist of Deloitte Touche Tohmatsu Limited.

Asia Pacific Economic Outlook, August 2014: China
Cover Image by Jessica McCourt (Cover), Stephanie Dalton Cowan (China)