Not a month passes without someone somewhere assuring me that China’s debt bomb is about to blow. It’s been like that for years. China’s imminent financial explosion is a core part of the global worry-kit we all carry around with us. But as China’s debt/GDP ratio has risen and risen, the story has got increasingly plausible.
So let’s take another look at the data, and its context. Spoiler alert: yes it’s bad, but it’s not unprecedented, and probably not lethal provided we’re in an environment in which rates rise relatively modestly.
Taking the data from the BIS’s quarterly global credit survey for 4Q17, China’s private sector credit to GDP ratio ended last year at around 260% - it is probably slightly lower today.
How bad is that? It’s bad, but not entirely unprecedented:
For all emerging markets, the average stands at 176.5%;
For all reporting countries it stands at 244.4%;
For advanced economies it stands at 276%.
So it is obviously worse than emerging economies, somewhat worse than the global average, and slightly less than the average for advanced economies. .
Drilling down, it’s obvious where the problem is: private sector non-financial corporate debt ended 2017 at 160.3% of GDP.
That’s definitely out of line with what we see elsewhere in the world:
The average for emerging markets standing at 104.6%,
For all BIS reporting countries the average stands at 96.6%
For advanced economies, it stands at 91.6%
But whilst non-financial private corporate debt is sharply higher than elsewhere in the world, there are two things to notice. First, this ratio peaked in 2Q16, and had fallen 6.6pps by end-2017. And it will certainly be lower now. As a rule of thumb, it usually takes a couple of years of credit restrictions before the bad news of bankruptcies begins to be realized. If it’s going to happen dramatically, it should be happening around now.
Second, there is the perennial problem of knowing how to determine what really constitutes ‘private business’ rather than disguised state enterprises. Note that for practical financial purposes, this is not entirely a matter of checking the shareholder register (if any), since the Party will certainly have serious effective representation within effective management structures. (Though, of course, creditors should certainly not rely on ‘implicit guarantees’ offered by anything other than central government organizations.)
Nevertheless, part of the too-high corporate debt/GDP ratio is offset by China’s lower-than-expected government debt/ GDP ratio. In China, government debt is running at 47% of GDP, which compares with
Emerging markets average of 49%
All BIS countries average of 81%
Advanced economies ot 100.9%
Taking corporate and government debt together brings the total to 207% of GDP, which compares with 154% for emerging markets, and 193% for advanced economies. Bad, and worth watching, but not necessarily damnable.
With corporate debt/GDP now stable, where’s the current debt build-up coming from? The household sector of course. By end-2017 this was equivalent to 48.4% of GDP, and rising.
How bad is that?
For emerging markets the average is 39.8%;
For all BIS countries the average is 62.1%,
For advanced countries it is 76.1%
The bit of private debt which is rising is h’hold debt, which is mainly mortgage debt. It continues to climb steeply, but the overall h’hold debt level does not look wildly out of the range where one should expect it to be.
Conclusion: China has a corporate debt problem, partly because China’s tax system doesn’t collect the revenues it needs to finance the growth it demands. It’s trying to deal with this problem, and is having some success in that, so far. The portion of debt which continues to grow in proportion to the economy is consumer debt. But for now, that’s not at atypical or worrying levels.