Mar 052012
 March 5, 2012  Posted by at 4:44 am Finance

During the last People's Congress under the present leadership (which had a ten year grip on power), China's leaders today announced a 7.5% growth expectation for the year. Which is quite a bit lower than previous years. And requires a significant jump in domestic consumption to boot, which is not a given.

First Global's Shankar Sharma & Devina Mehra write in India's Business Standard that China's debt picture may well have been very poorly understood and documented to date. One has to wonder what monsters will come out of this closet:

China's $22 trillion time-bomb

The common wisdom is that China runs a very low debt-to-GDP ratio of around 30 per cent (this ratio was in the low 20s till 2007 but jumped sharply during the 2008 crisis), which gives it lots of firepower to keep reflating the economy and to keep recapitalising its banks. The reality is that this ratio is plain wrong. China’s growth model is based on the oldest rapid economic growth hormone available: debt.

China has debt at various levels and pockets. Let’s add to this central debt, the local government and provincial debt figures. This figure is around $1.9 trillion. Let’s further add the obligations of the Ministry of Railways. That’s $360 billion. And finally let’s also add 80 per cent of outstanding bank credit. This adds $6.3 trillion. We add bank loans to national debt because unlike most countries, China uses banks for nearly all of its directed, policy lending programmes. For example, the stimulus of 2008-09 was financed largely by banks. 

By pushing its lending via the banks’ balance sheets, China creates the impression of a country that has very low budget deficits and, of course, very low central debt. We take 80 per cent of bank debt into the national debt figures under the assumption that 20 per cent goes towards consumer and private sector credit.

Now let’s total up the few trillions we have unearthed. As of 2011, this figure amounted to a tad over $10 trillion! And the ratio of total debt to GDP becomes a more ominous 149 per cent. Mind you, there may be other debts that are obligations of the central government that we don’t know about since reliability of data in China is suspect, to say the least. It is eminently possible that debt is understated and GDP overstated.

But the story gets worse from hereon. China’s growth model is highly capital or, more accurately, debt intensive. We have calculated a ratio called DIG (debt intensity of GDP), that is, the amount of debt needed to generate one unit of GDP. This ratio started out being in the 0.9 to 1.2 range in the first half of the nineties. During the Asian crisis, this ratio worsened to around two as China again threw loads of debt to come out of the slowdown. The ratio subsided a bit to below one in the boom years from 2003 to 2007. 

But it jumped dramatically to over four in 2008 as China threw a huge amount of money at an unprecedented slowdown. The trouble is that given the overall low growth environment globally and the worsening trade situation for China, generating a unit of GDP growth now requires higher and higher doses of debt. And, in hindsight, we will look back and say this stimulus of 2008-09 was a colossal mistake.

So what does the DIG ratio lead us to? See the table.



As we can see, each crisis leads to a worsening of the DIG ratio and, concomitantly, a sharp worsening of the total debt-to-GDP ratio as China starts building bridges and roads to nowhere in order to reflate.

The bigger problem lies ahead. Given this inclined treadmill model, if China grows faster, the bigger the debt problem becomes. For the sake of calculation, let’s assume the DIG ratio goes to 1.7 over the next four years till 2016 and that China wishes to grow at eight per cent. The total debt-to-GDP ratio at the end of 2016 becomes 180 per cent, up from the 150 per cent of 2011! In absolute terms, China’s total debt will reach $22 trillion. 

Coupled with a worsening demographic picture, this high total debt-to-GDP ratio becomes a trap from which there is virtually no escape. To compound the problem, China’s private consumption expenditure (PCE) to GDP has declined sharply to 33 per cent from 55 per cent 20 years ago. The ratio of net exports to GDP has fallen to 3.9 per cent in 2010, from 8.8 per cent in 2007. It’s only the ratio of gross fixed capital formation to GDP that has jumped to over 50 per cent in 2011 from 25 per cent a few years ago. As is clear, if China has to maintain its pace of growth, it has to pile on more debt. If it slows down, its social powder keg starts getting incendiary.

We are not even counting the burgeoning, widespread non-performing loans problem that is looming large and will, in all probability, lead to China’s fourth systemic banking crisis in less than 25 years. If this is a growth model, then it is even worse than the Western growth model.




Home Forums Is China just another debt addict?

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  • #8601

    During the last People's Congress under the present leadership (which had a ten year grip on power), China's leaders today announced a 7.5% gr
    [See the full post at: Is China just another debt addict?]


    I wonder if that debt is external or internal. I’m betting internal.

    So they are heading right to the Japanese club who’s membership requirement is 200%+ in internal debt.

    Golden Oxen

    Appears to be an informative article; unfortunately my brain goes tilt at the $22 trillion time bomb headline. China’s debt, the entire world’s debt can no longer be comprehended by the sane. What comes after a Trillion, a Zillion? Is a Zillion a Million Trillion, or is it a Trillion Trillion? Might I place the idea of a world wide debt moratorium, or debt forgiveness scheme on the table for comment.? Yes, it is an outlandish idea, but at least understandable.


    I’ve actually realized I now a days dont even consider millions of some currency even material information. And when the headlines are full of Billions, then I might be somewhat interested. It has come to the point that if the news is not for some hundreds of billion I feel that its not even worth reading!

    Totally absurd. 30 years ago it was millions, 10 years ago it was billions, now its trillions. Just add 3 zeroes for every 10 years.

    Debt forgiveness would betray the people who actually have remained sensible and not over endulged themselves when it comes to debt/lifestyle.

    If only our politicians would understand that the wealth of a nation is not how much it can borrow, but how much the citizens have of saved income to invest. We somehow lost the entire meaning of money and what it means to be able to store value for the future. Making money from money instead of work seems counterintuitive for me.

    Something to think about:
    For the average Swede it will take between 80 to 100 years to pay back the mortage they have on their home. 80-100 years!

    This with the full backing of the banks.

    It takes two to tango and boy are we rocking down the house with this dance!


    And the Greek situation seems to be coming to a head. Have a look at this blog, by John Ward in England. I’ve been reading it every day and I find that he has some good sources and insightful judgements:

    GREEK BONDHOLDERS: The last big unknown on the road to Greek default


    The Chinese are

    Of course they are addicted to debt, not just their own but everybody else’s also. They hold more worthless Toilet Paper issued by other countries than anybody else. They are SWIMMING in their own debt AND everybody else’s.

    China came into the Industrialization game a Day Late and a Yuan short here. The whole apparatus built there over the last 20 years is all Debt financed. To pay off, they have to be able to export and sell their toys. They cannot do that unless they will vendor finance still MORE debt, because nobody else has money to buy their toys anymore, at least not in quantities their over capacity is capable of producing. Factories will shut down, and when they do they no longer pay on the debt taken on to build them. That debt isn’t repaid here, its just been rolled over for 20 years.

    With their population overshoot and ecological issues on TOP of their unsustainable economics, the Chinese are screwed 6 ways from Sunday, the only worse off Nation on the surface of the Earth is Japan. When these two countries hit the Wall, it wil not be pretty. The Economic Meltdown will make Fuk-U-Shima look like a Sunday Picnic. Soft Crash for China is NOT gonna happen. When they go down, and go down they will, its going to be Wiley Coyote at the Bottom of the Grand Canyon.

    They are still in the Levitation Period, but the drop is coming. Its not the drop that Kills you either, its the rapid deceleration when you hit the bottom.



    China can do what the west will not do.

    With a stroke of a pen … debts are wiped out

    With a stroke of the sword … the 0.01% are wiped out or they are sent overseas, to their doomstead, to continue their cash flow extraction skills for the benefit of China.


    This article is basically an excerpt from Michael Pettis’ most recent newsletter. For those who do not already know – he is regarded by many as an expert on China’s economy:

    China headed for 3% growth

    There is a growing amount of unrepayable debt in China and ultimately most if not all of it will end up on the government’s balance sheet.

    The World Bank report apparently doesn’t say, but the consensus has been slowly moving down towards 5-6% annual growth over the next few years. That’s better than the crazy numbers of 8-9% most analysts were predicting even two years ago (and some still are), but it is still too high. GDP growth rates will slow a lot more than that. I still maintain that average growth in this decade will barely break 3%. It will take, however, at least another two or three years before a number this low falls within the consensus range.


    Money represents work done be it mental or physical. Debt represents the promise of work to be done. If debt is somehow eliminated artifically (stroke of a pen) then those who have done work will no longer trust those who promise to do it. Economy frozen.

    Golden Oxen

    @Babble True enough, however the fact remains that it cannot be paid. At least not with money having the same value as when it was borrowed. Perhaps it is a price we pay for letting it happen??.

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