The net debt of the non-financial components of the Shenzhen 300 Index is heavily concentrated in a dozen or so companies, all of which contribute to basic energy or transport infrastructure. A full 10% of the net debt of non-industrial SHSZ300 companies is owed by Petrochina alone.

This suggests that a great deal of Chinese corporate indebtedness should be viewed as “public works” investment by the Chinese sovereign. There certainly are aspects of the increase in indebtedness that recall Japan’s dependence on public works spending as a channel for economic stimulus. But the point to take away is that we are NOT looking at a speculative bubble in corporate debt but a heavily-concentrated investment in state-sponsored infrastructure.

1. where is Chinas debt

2. list

The companies listed above account for 2/3 of the net debt of the Shenzhen Index excluding financials, and they are almost all energy, communications infrastructure, shipping, airlines or metals companies.

The Shenzhen Index has sectoral sub-indices. Below is the (normalized) time series for the debt coverage ratio (net debt/EBITDA) for the nonfinancial sectors.

3. China net debt-EBITDA by sector

Contrast this to the overall index Net Debt/EBITDA ratio:

4. Net debt-EBITDA Shenzhen 300

The overall index number does not exclude financials, which should be measured differently. Nonetheless, it seems less alarming. It is less alarming, though, if we consider that the bulk of the debt is concentrated in firms that are central to national infrastructure, and that that China’s real GDP is about 2.5x the size it was in 2008.

Using an entirely different approach, Guonan Ma (in a forthcoming article for Singapore Economic Review) calculates liability/equity ratios for different sectors, showing that the industry ratio has actually fallen steadily over the past 20 years, while the construction ratio has risen.

5. LIability-equity ratios
Source: Guonan Ma/BIS

The construction sector, though, is also part of national infrastructure as China continues to shift population to cities from the countryside.

Dr. Ma shows that Chinese debt is overwhelmingly concentrated in the corporate sector, while other countries show a greater proportion of corporate and consumer debt.

6. International comparison of debt composition
Source: Guonan Ma/BIS

But the company-by-company breakdown of the location of the debt suggests that in China’s state-dominated economy, this distinction blurs the underlying economics: A very large part of Chinese debt is state infrastructure spending masquerading as corporate debt.

That is not the stuff out of which financial crises are made.