China's robotics sector could fall into a debt-ridden black hole
Chinese robot makers are heading towards a debt-filled crisis as the increasingly overcrowded market for automated machines reaches overcapacity.
Dozens of Chinese cities have opened industrial robotics parks in recent years in an attempt to place themselves at the forefront of the industry.
The parks are largely funded by a ‘local government finance vehicle’ (LGFV), a state-sponsored program that offers money and a raft of other incentives for firms that want to set up there.
The LGFVs, which can be worth hundreds of millions of dollars, are financing rapid infrastructure growth - some needed, some not - and are rapidly boosting China's already high debt burden.
Meanwhile, investors are gambling that Beijing will not allow the debt to default while infrastructure remains a critical support for growth and have bid up LGFV bonds to new highs as a result.
Beijing's drive to make the nation a leader in robotics through its ‘Made in China 2025’ initiative launched last year has set off a rush as municipalities up and down the country vie to become China's robotics centre.
The investment boom comes as the industry is already showing warning signs of overcapacity, despite increasing demand for robots in auto manufacturing and electronics.
Growth in demand for industrial robots in China fell by more than two-thirds to 17 per cent in 2015 and yet more than 40 robotics parks have sprouted throughout the country in the last two years, according to industry data.
Many of the items under development in these parks border on novelties, like robotic waiters, military grade Segway’s or even items as diverse as air-conditioned helmets, horizontal showering pods for hospitals and robotic exoskeletons that allow the very old and the disabled to walk. Earlier this year, a robot monk that can chant religious mantras, move via voice command and hold a simple conversation was installed in a Buddhist temple near Beijing.
In June, the National Business Daily reported Vice Minister of Industry and Information Technology Xin Guobin warning that China's robotics industry is showing signs of over investment and of ‘a high-end sector becoming low-end’.
LGFVs first gained popularity in China in the 1990s as a way to fund municipal projects without running afoul of new restrictions on cities' official borrowing.
They also played a key role in shoring up economic growth in the global financial crisis but also became a major source of China's debt burden.
Outstanding debt was $26.5tr (£19.9bn), or 255 percent of gross domestic product at the end of 2015, up from 220 per cent just two years before, according to the Bank for International Settlements.
A short-lived crackdown by Beijing on LGFV financing in late 2014 was quickly watered down as growth sputtered to a twenty-five year low last year.
In China as a whole, LGFV bond financing climbed 72 per cent in the first five months of 2016 from the same period last year to 740 billion yuan (£84bn), while the vehicles' total outstanding bond debt now stands at around five trillion yuan, according to Everbright Securities data sourced from the Chinese information provider WIND.
"Loads of infrastructure-investing companies are exhausting every means they can get to get money," says Li Yujian at Bohai Trust, which offers high-interest loans to companies who cannot get all the financing they need in mainstream debt markets.
Meanwhile, increasing automation could have a dire impact on China’s job market. A recent study by the International Labour Organisation found that robots could endanger the jobs of more than half of workers in five South-east Asian countries over the next two decades with 137 million workers at risk.