China’s highly distorted private equity funding

CHINA FINANCIAL - Report 18 Sep 2018 by Michael Pettis

Special points to highlight in this issue:
• Economists usually try to evaluate a country’s debt position according to various debt ratios, but what often matters even more is how institutional distortions affect debt dynamics. China’s financial system is locked into a process in which excessive credit creation has become embedded into the financial system.
• In that case the only way to regain control of credit is for the regulators to force through deep, and possibly disruptive, institutional reforms. Until they do, it is hard to see how Beijing can slow credit growth to sustainable levels.
• We can see how this works in the way debt dynamics have transformed China’s private equity market into something very different from a “normal” private equity market, generating debt among borrowers least able to absorb debt and resulting in an overvaluation of companies that issue private equity.

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