Give a Western investor a word-association test with the word “China,” and the response will be “debt bubble.” Corporate debt levels in China, to be sure, look huge by international comparison. But a detailed look at the country’s corporate debt shows that infrastructure spending rather than speculation explains most of the debt growth of the past ten years.

Manufacturing, healthcare, and other major corporate sectors actually show declining leverage. The bulk of corporate debt has built up in energy, power production, rail, and airlines – sectors that in many other countries would be funded directly via the state budget. China has been borrowing mainly to expand infrastructure.

There are sectors where borrowing levels raise the concern of regulators, to be sure, especially in the property market. Although long-term property fundamentals remain strong, some property companies may have borrowed too much to get in front of consumer demand. This doesn’t appear to be a systemic problem, however.

In fact, corporate leverage is falling. According to the Bloomberg consensus of earnings estimates, the ratio of net debt to earnings before interest and taxes will fall to 2.5 times in 2018 from 3.71 in 2016. This ratio was negative as late as 2013 (companies were net creditors), but the trend has turned around.

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Leverage is falling because profits are rising. In sharp contrast to price deflation and slumping profits in 2014-2015, China’s industrial profits are up 24% year-on-year, in line with rising industrial prices. Balance sheets are improving, leverage (as measured by the ratio of net debt to earnings before interest and taxes) is declining, equity prices are buoyant, and new equity issuance is at a record.

The sun is shining, in other words, and that’s the time to fix the roof. Chinese regulators at the ongoing party congress in Beijing have indicated they will take a tougher approach to controlling leverage growth. The long-serving head of the People’s Bank of China, Governor Zhou Xiaochuan,  warned on October 18 that “excessive optimism” could give way to an eventual collapse in asset prices.

According to Bloomberg, “Zhou cited a concept known as a “Minsky Moment,” a plunge in asset values following unsustainable gains or the exhaustion of credit growth, named for Hyman Minsky.

The central bank chief told Bloomberg: “When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified. If we’re too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a Minsky Moment. That’s what we should particularly defend against.” Zhou cited high corporate borrowing, as well as corporations’ use of local government financing vehicles.

Zhou’s cautionary advice, though, describes a situation in which excess debt levels are localized in sectors that are best able to support them, rather than a generalized speculative excess.

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. 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.

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Leverage has actually declined in some sectors while it has mushroomed in others. In the chart below we examine the ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) of the sectors of the Shenzhen 300 stock index. For visual comparison the ratio is set to 100 as of September 1980.

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The Industrials Index leverage is up 250% over the past ten years. This index consists overwhelmingly of infrastructure companies: Xinjiang Construction, CRRC (rolling stock), China Railway Group, China Shipbuilding, Daqin Railway, China Railway Construction, Shanghai International Airport and Weichai Power are its largest constituents.

In the past decade China has built a national high-speed rail network and vastly expanded other infrastructure. That is where the largest portion of “corporate debt” sits. The materials sector also shows a large increase in leverage. There, problems in the coal industry are mainly responsible for declining revenues relative to debt levels.

Consumer Discretionary companies’ leverage has actually declined sharply over the past decade. The auto sector dominates this index. The Consumer Staples Index, by contrast, shows a big jump in leverage, but that reflects borrowing by a small group of companies.

This analysis suggests that a great deal of Chinese corporate indebtedness should be viewed as “public works” investment by the Chinese state. Certainly, there are aspects of the increase in indebtedness that recall Japan’s dependence on public works spending as a channel for economic stimulus. There are inefficiencies to be made, for sure, but by and large the debt sits where the economy best can support it.