China’s Debt Bomb & its potential affect on the Financial System [Infographic]
Australia’s economy is closely linked with China.
China’s growth and requirement for our resources saved us from the post GFC recession many countries experienced, and now it’s economic slowdown has impacted our economy negatively.
So what’s ahead for China?
China’s debt is escalating fast and because the official numbers are dodgy no one knows if China’s debt bomb is a hand grenade or a nuclear explosion, or it’s potential impact on the financial system.
Visual Capitalist produced this infographic to give us some insight into the various estimates to the size of China’s debt bomb, its payload, and what might spark the fuse.
Courtesy of: Visual Capitalist
The ramp up in Chinese debt accumulation has been a leading concern of investors for years.
The average total debt of emerging market economies is 175% of GDP, and skyrocketing corporate non-financial debt has launched China far beyond that number.
The real question is: by how far?
The answer is disconcerting, because nobody really knows.
If the Chinese debt bomb is detonated, the impact on markets is anybody’s guess.
Kyle Bass says the losses would be 5x that of the subprime mortgage crisis, while Moody’s says the bomb will be safely disarmed by authorities far before it goes off. [adrotate group=”16"]
Mckinsey came out with a widely-publicized estimate of China’s debt at the beginning of 2015.
Using figures up to Q2 2014, they estimated that total Chinese debt was 282% of GDP, an increase from 158% in 2007.
Since then, various trusted organizations have come up with follow-up estimates.
On the low end, Goldman Sachs came out with an estimate in January 2016 of 216% total debt-to-GDP for 2015.
(A few months later, they put out a separate report saying that total debt-to-GDP was estimated to be closer to 270% for 2016.)
On the high end, Macquarie analyst Viktor Shvets said that China’s debt was $35 trillion, or “nearly 350%” of GDP.
The truth is that it’s anybody’s guess.
China’s official estimates are fairly useless, and the country has a massive and quickly evolving shadow banking sector that complicates these projections significantly.
DEFUSING THE BOMB
If there’s something that can ignite the fuse of China’s debt bomb, it’s non-performing loans (NPLs).
An NPL is a sum of money borrowed upon which the debtor has not made scheduled payments.
They are essentially loans that are either close to defaulting, or already in default territory.
China has an official estimate for this number, and it is a benign 1.7% of debt.
Unfortunately, independent researchers peg it much higher.
Bullish analysts have the number pegged in the high single-digits, while bearish analysts put the range anywhere between 15% and 21%.
Even the IMF says that loans “potentially at risk” would be equal to 15.5% of total commercial lending.
If there’s a place to start defusing the bomb, this is it.
Originally published at Property Update.
