13 charts on China’s debt issue!

Everybody is talking about China’s massive debt bubble, nowadays. With every major economic publication, new charts surface, imaging China’s debt issue. Hence, for your and mine convenience, here are 13 of the most telling Chinese debt charts.

1. How big?

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The first chart should, obviously, answer this question. Just how big is China’s debt issue? Well, pretty big. China’s total debt-to-GDP ratio is heading for 300%. Back in 1996 it was just above 100%. Three times the size of the economy, that’s a formidable number under any circumstance.

2. How big compared to others?

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The Financial Times chart above shows how China’s debt pile stacks up against that of other countries. After stripping out the financial sector (no worries, I’ll cover that in a minute) China’s debt-to-GDP ratio is comparable to that of Italy, and is already higher than that of the UK and US.

3. Moving where?

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Next, another revealing Financial Times chart. China’s debt-to-GDP ratio is rising at a faster pace than any other country, which implies China will move up in the ‘debt ranking’ quickly. At this pace, China could cross Greece within a couple of years.

4. The main driver?

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China’s debt issue is rooted in the corporate sector. As the chart above shows, corporate credit growth has topped (nominal) GDP growth every year since the outbreak of the financial crisis, except for 2011.

5. A bubble?

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Well, just take a look at the numbers in this chart. Credit growth to the private sector in China and Hong Kong has been incredible. No other country comes even close to these numbers.

6. Could this be a problem?

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Historically, though, there have been countries which also experienced such a massive rise in private sector credit growth. As the chart above reveals, for those countries that managed to ‘beat’ China, things did not end well!

7. What about banks?

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Things begin to look really scary when banks are involved. Contrary to debt-to-GDP levels, China’s banking sector is already much bigger than that of the Eurozone and the US. Also, check out the phenomenal rise of China’s banking sector compared to 2007. A 171% rise in less than a decade!

8. Shadows?

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The ‘funny’ thing is that the previous seven charts are likely to underestimate China’s real debt levels. China has a lively shadow banking sector that has also grown exponentially in recent years. If you take a closer look at all the exotic and resourceful financing schemes it becomes obvious there should be even more debt out there.

9. What does it cost?

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All this debt accumulation has also led to a dramatic rise in debt servicing cost. Since 2009 debt servicing as a % of GDP has increased by two-thirds, and now tops 30%, according to BIS data.

10. Due when?

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Fortunately, China’s government has big pockets, and could theoretically take some of hit if things would go awry. However, the looming maturity wall has become so large, that the government’s ability to sweep up bad loans certainly has decreased. Chinese companies face record bond payments in 2016.

11. Changing behavior?

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Already we are seeing some changing behavior in China’s debt markets. The number of bond issuances that are cancelled or postponed has shot up in recent months, suggesting things are getting more difficult.

12. Rising default?

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Yes, defaults are rising. And, taking into account the perceived ‘willingness’ of the Chinese government to let defaults happen and the big maturity wall of 2016, defaults are likely to further increase in the short-term. As the chart above demonstrates, both the number and size of defaults are rising.

13. China defaults?

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The final chart shows the implied probability for the Chinese government to default. While this would only happen in the event of a hard economic landing causing a disorderly corporate default cycle in which lots of capital tries to get out, a likelihood of 10% for the world’s second-largest economy to default remains impressive.


One response to “13 charts on China’s debt issue!

  1. Pingback: News: Real Estate, Risk, Economics. May 9, 2016 | PropertyPak·

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