China faces a lost decade, fears Fitch Ratings, giving a high-end estimate of non-performing loans (NPLs) of 15 to 21 percent of, or 10 times the official ratio.
In the first place, this is clearly an upper ceiling: given the slowdown in velocity of money over the past two-plus years, it's only natural that more loans than before are taking longer to get repaid. Many firms are simply taking far longer than before to get compensated for their products and services, so it's natural that they're also taking far longer to meet their liabilities; but in most cases they eventually will.
In this light, it's encouraging that money supply (M2) growth picked up in August after worrying signs of decline in preceding months which some portended to be a looming "liquidity trap"; as money growth continues to rebound, the NPL ratio will naturally start to look healthier.
Beyond this, it's worth noting that even the aggregate debt-to-GDP ratio and credit efficiency metric used by Fitch are actually better than they appeared earlier this year. At 253 percent of GDP, this year's debt-to-GDP is already well below the most alarming estimate of about 350 percent for last year. And the credit efficiency ratio of 0.3 is far above the 0.2 or even less that was cited back in spring, when the Q1 stimulus was only starting to take effect.
Over and above all this, there are tentative yet clear indications that supply-side reforms are starting to pick up, and that this has already begun to ease the pressure for more stimulus, especially monetary but even fiscal as well.
A lost decade isn't quite in the offing, and the pessimists' own revised figures are unwittingly weakening their own case.
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