“Three key aspects – reinforced!”

China data reinforces three key aspects of global debt dynamics

The key chart

The chart from 2019 – China’s HH credit growth outstripping GDP growth despite the fact that the HH debt ratio was close to the average for all BIS reporting countries (Source: BIS; CMMP)

The key message

This week’s news of weaker-than-expected economic growth in China and on-going challenges in the country’s property sector reinforces three key aspects of global debt dynamics:

  1. Conventional macro thinking is flawed to the extent that it typically ignores the risks associated with private debt (while seeing government debt as a problem)
  2. The “EM-debt” story has, for some time, been replaced by the “China-debt” story – strip out China and EM’s share of global debt is largely unchanged since the GFC
  3. The level of any country’s debt needs to be considered in relation to its rate of growth (and its affordability and structure).

In an early 2019 CMMP Analysis report (“Too much, too soon?“), I concluded that:

“The risks associated with excess HH credit growth in China remain elevated and this analysis presents a relatively extreme example of the importance of considering the level of debt together with its rate of growth. History suggests that current trends in China are unsustainable. The most benign outcome is that the rate of growth in HH borrowing slows more rapidly with negative implications for consumption and aggregate demand. In short, China’s increasing HH debt burden represents a key headwind in the transition to a consumption-driven economy.”

Debt dynamics matter, a lot, but conventional approaches to understanding them need updating.