By one measure, China's debt problem is now bigger than Greece's

[GennGreymane]

http://uk.businessinsider.com/chinas...#ixzz3iQ6fcgC1

If the stock market is an engine of economic growth, then debt is the financial world's rocket fuel. Use a little and you go faster, use too much and you explode.

For the last few years, China's companies, banks and local governments have been dousing themselves in debt. But there may be a naked flame approaching in the form of the US Federal Reserve.

Loans to companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.

If that doesn't worry you, consider that Greek debt is "only" 185% of GDP. ("Normal" debt for a country is somewhere around 100% of GDP.)

Corporate debt in China has grown faster than in any other top 15 economy.

Here's the chart:

Chinese corporate debt BAMLBAML

Much of the debt explosion has come since 2007, as this chart from a McKinsey report earlier in the year shows:

China 2007 debt explosionMcKinsey

Some of this has its roots in the response to the 2008 financial crisis. Central banks around the world lowered interest rates to record low levels and bought up government debt to shore up the financial system and keep the cheap money flowing.

Investors in bonds were squeezed out as yields, the return on their investment in debt, dropped sharply. They took to hunting chunky yields elsewhere, and found plenty of willing borrowers in the emerging markets and China.

A paper published last week by the Bank for International Settlements shows this in a handy diagram:

BIS graph 1BIS



China dominates these kinds of investments. Its companies borrowed around $377 billion between 2010 and 2014, according to the BIS report (emphasis ours):

Low long-term rates at the centre of the financial world helped to push foreign investors into local government bond markets in many emerging markets that offered higher yields. It has also encouraged increased EM borrowing on capital markets – corporations in foreign currency on international markets and governments in local currency on domestic markets.

At some point, all this will reverse – gradually or abruptly.

That point might be coming soon. The US Federal Reserve has been hinting strongly that rates are about to go up. Analysts from Barclays said in a note today that "our expectation is still that the committee would move toward a September rate hike as the US data improved coming out of 1Q."

As interest rates start to go back up, fewer investors will need to take risk in less-tested markets to find a decent yield. With fewer lenders, the cost of borrowing will go up, making it harder for Chinese companies to issue more debt to pay back their existing debt.

This is big a driver of financial crises. As defaults rise, others who were depending on that money also default or cut back on expenditure, creating a vicious circle.

Falling ratesBIS

China's policymakers are very much aware of this danger have been cutting interest rates domestically to encourage domestic lending, but the BIS casts doubt on how effective they can be as the global interest rate, influenced by the US, plays a greater role in their own domestic financial system.

"Monetary policy in the emerging markets has lost some traction as hard-to-influence long-term rates have become more important in their financial systems," says the BIS.

Even with great interest rate conditions, borrowing is usually only a good idea when there are decent prospects for future growth and reasonably high levels of inflation, which makes paying it back cheaper relatively speaking.

China is facing slowing growth and inflation figures out last week showed producer prices falling more than 5% month on month, 41st drop in a row.

So will this all end in a fiery debt explosion? Some people point to the huge reserves of the Chinese state, around $3-4 trillion and currently being deployed in the stock market to keep it afloat, as a buffer

But before every crisis, you usually hear the four magic words – "this time it's different."

[Deleted]

China's debt may be bigger than Greece's, but it has a bigger economy to compensate.

Its debt is proportional to the size of its economy.

Just quoting X trillion debt is a statistical fallacy.

What is China's debt in terms of a percentage of its GDP?

[Deleted]

China's debt may be bigger than Greece's, but it has a bigger economy to compensate.

Its debt is proportional to the size of its economy.

Just quoting X trillion debt is a statistical fallacy.

What is China's debt in terms of a percentage of its GDP?

Exactly.
Unlike Greece, China actually has the economic muscle to pull itself out of these bad situations.

[GennGreymane]

The issue is the huge wipe out they had a few weeks ago and the stock market issues. Compounded with this may cause a few problems.

[Kasierith]

China has a robust supply of industry and natural resources... Greece does not. Greece's primary problem is that it's limited to being a service economy. Because of this, they are not really comparable in terms of long term economic prospects.

Not that China can't fail financially, just that Greece isn't the best point of comparison.

[GennGreymane]

China has a robust supply of industry and natural resources... Greece does not. Greece's primary problem is that it's limited to being a service economy. Because of this, they are not really comparable in terms of long term economic prospects.

Not that China can't fail financially, just that Greece isn't the best point of comparison.

Likley not, but it did stick out to me personally as I've been keeping track and there are very worrying issues in China right now when it comes to fiances.

[Yvaelle]

China's debt may be bigger than Greece's, but it has a bigger economy to compensate.

Its debt is proportional to the size of its economy.

Just quoting X trillion debt is a statistical fallacy.

What is China's debt in terms of a percentage of its GDP?

Debt-to-GDP is a proportional measurement. Nobody quoted X trillions, Business Insider is reporting on data compiled by Bloomberg which is suggesting China skyrocketed to 207% Debt-to-GDP, above Greece's 185%: and that may be hiding further Chinese corporate debt, which has not yet been posted.

@OP

Interesting read thanks. I've posted a lot about the common understanding of debt-to-GDP ratios being off before, and suggested 200% was perfectly sustainable for developed nations (and even 300% might not be dangerous). China is an odd mix though - it has highly developed microcosms, and a developing majority to rival any other low level of development in the world.

It's huge and diverse and powerful, and all three of those traits allow it to leverage a higher debt-to-GDP ratio - but the real risk here is the degree to which foreign investors recognize the resiliency of China and are willing to stick it out. Obviously this does not spell the end of China - but it could spark a recession - potentially even a global one (China doesn't havea fraction the influence the US does, though - so no 2008) - and foreign investors are going to want to pull their money if they think that's the case: that would cause a cascade failure. Instead, China will probably prevent money from leaving China - which will be just as bad for any recession, but would help the Chinese government in the short-term.

The key to running a high Debt-to-GDP ratio, is doing it intentionally - announcing you plan to go that high - and having the economic forecasting skills to nail your models consistently: no surprises allowed (and that's hard). Some banks tend to be very good at this, and China isn't one of them in my book (they never needed to be, they have been booming since the 80's).

[Independent voter]

Yeah, I agree, the big problem with China is that it's not know how it will handle things. I've always thought that Japan should be doing better than it is and the reason it isn't is all psychological. The US has a crisis and then immediately it's like it never happened. In Japan and maybe China the pain of the crisis sticks with people.

I don't know, wait and see.

[GennGreymane]

Yeah, I agree, the big problem with China is that it's not know how it will handle things. I've always thought that Japan should be doing better than it is and the reason it isn't is all psychological. The US has a crisis and then immediately it's like it never happened. In Japan and maybe China the pain of the crisis sticks with people.

I don't know, wait and see.

No clue what makes it so different, Japan is a whole nother issue. Japan is also very insular, the U.S has plenty of places it does business with, Japanese business and culture tends to favor keep it inside the home mentality. The crisis started in the U.S and Europe and there was fast reaction, reaction was not fast in Japan.

You can also see major differences just with the recent reactor problem, it was not a government official who was talking on the T.V about the clean up for a while... it was one of the companies reps

if this had happened in the U.S or Europa, the government agency woulda stepped in told the company to shut up, and get things fixed

[unbound]

China's debt may be bigger than Greece's, but it has a bigger economy to compensate.

Its debt is proportional to the size of its economy.

Just quoting X trillion debt is a statistical fallacy.

What is China's debt in terms of a percentage of its GDP?

This.

China's public debt as a percentage of its GDP is 22.4% as of December 2013. Greece's percentage was 177.1% as of December 2014.

[logintime]

Ratio aside, the main difference is that China has full control over its currency, whereas Greece does not. There are reasons why Iceland was able to recover faster than Ireland from the great recession, even though Iceland was hit much harder, and part of that was that Iceland was able to devalue its currency to both lessen the debt load and make it more competitive in the global market. Greece is being mismanaged, but it also has no say over the euro, and that's hurting the country as much as anything else.

[Deleted]

And there goes the world's most powerful economy. Time to build some more ghost towns in China just to get the GDP going.

[GennGreymane]

Obviously I agree that its a silly comparison, but China in recent months has been so,mething to pay attention to, this article was just one way of looking at it

only a few weeks ago they lost how many trillion again? Thats terrible! It also shows insight into how China can handle these issues.

[Anyael]

The issue is the huge wipe out they had a few weeks ago and the stock market issues. Compounded with this may cause a few problems.

The Chinese stock market is worth a pittance in comparison to its overall economy -- that is not the case with the developed world.

[GennGreymane]

The Chinese stock market is worth a pittance in comparison to its overall economy -- that is not the case with the developed world.

this is true, but shows issues within its corporations.