According to analysts Sberbank CIB Andrey Kuznetsov and Cole Axon, the amount of debt in the Chinese economy is nearing a dangerously high level and will not grow further at the same pace. “The subsequent reduction of debt may lead to a “hard landing” of Chinese economy. We believe that the current “bubble” of credit — the single most serious risk factor for raw material prices and the Russian stock market”, — they noted in their review. Now the cost of debt servicing Chinese companies reach 12% of GDP, while the economic growth is 6%.
The main threat for the Chinese economy — the growth of arrears, which was estimated to Sberbank CIB, has reached 8-10% of the total portfolio, while the provision for bad debts account for only 3% considering the fact that the shortage of capital in the Chinese banking system is 6-10% of GDP, analysts consider the high probability of a negative scenario for the Chinese economy. This means a devaluation of the yuan and the slowdown in economic growth. “The weakening of the national currency — the standard way to solve the problem of excessively high debt. According to our estimates, the yuan could be devalued by 20% (although the actual magnitude of the devaluation will depend on the date)” — written by Andrey Kuznetsov and Cole Axon.
Falling prices for Chinese goods (due to the cheap yuan) will provoke a wave of deflation in the world economy and will force developed countries to impose protectionist measures to protect domestic markets and producers, said in a note analysts.
Kuznetsov and Cole believe that the reduction in the debt burden in China will hit the segment of risky assets and in the majority of commodity markets, and, consequently, for Russia. The most affected may be the mining industry, which depends on macroeconomic dynamics in China, analysts warn. “Paper companies such as Severstal, NLMK and MMK are likely to outperform the market, while the “debt bubble” in China will continue to swell, but when it burst, these companies will suffer most strongly”, — stated in the review. Besides, as analysts of Sberbank CIB, from Chinese financing depend on several oil and gas companies: Rosneft, NOVATEK and Gazprom.
China in February 2016, has imported record amounts of oil, and Russia was third in the list of exporting countries, increasing per year of oil delivery to China by 48% to 1.03 million barrels./day, reported Reuters, citing customs data fresh. In the March report of the International energy Agency stated that China has replaced Russia and Germany as the major importer of oil.
On other segments of the Russian economy debt problems in China can be affected indirectly, mainly due to the change of the ruble, according to Sberbank CIB. “To assess the impact of China’s economy on the Russian currency is difficult because it is mediated through commodity prices”, — says Andrey Kuznetsov. He said that the effect of a hard landing of the Chinese economy for the ruble depends on the moment when this will happen. “The longer China will keep its currency, the more significant will be the final correction,” says the analyst.
Chief expert of center for economic forecasting Gazprombank Yegor Susin, says that Chinese financial authorities have the tools to prevent the collapse of the economy.
According to him, the bursting of the debt bubble are only limited impact on oil prices. “Oil prices could fall and remain at $25-35 a few years,” he predicts. In this case, the ruble, the expert does not exclude, can again fall to the lows of January 2016, In the beginning of the year because of the collapse of the Chinese stock market the price of a barrel of Brent fell to $28, the dollar at auction Moscow exchange in mid-January, rose above 80 rubles, and the maximum reached 85 rubles.