The key chart
HH debt ratios (% GDP, y-axis) plotted against NFC debt ratios (% GDP, x-axis) for selected BIS reporting economies with high private sector debt levels (Source: BIS; CMMP)
The key message
The latest BIS data release (18 September 2023) provides another example of how China stands out among relatively indebted, global economies. In contrast to developments elsewhere, the debt ratios of both the corporate (NFC) sector and, to a much lesser extent, the household (HH) sector rose between 1Q22 and 1Q23 – putting the idea of a balance sheet recession on hold, at least for the time being.
In 1Q23, China’s private sector debt ratio hit a new high of 227% GDP. This is the same level reached at the peak of Spain’s debt bubble in 2Q10 and 13ppt higher than Japan’s peak back in 4Q94. As noted before, the level of bank credit to GDP is much higher in China than in other “bubble phases”, leaving the country’s banks relatively exposed to the risks of private sector indebtedness.
Affordability risks also hit a new high, with China’s private sector debt service ratio reaching 21.3%, 5.5ppt above its long-term average. China’s private sector is unique among BIS reporting economies in terms of recording a new debt service ratio high in 1Q23, although the same is also true for the HH debt service ratios in Canada, Korea and Sweden.
With growth slowing, China appears to be reverting to higher levels of corporate credit as a solution, at least in the short term. The risks associated with this familiar strategy remain high. If successful, however, it would represent a unique chapter in the history of global debt dynamics.
Putting the China balance sheet recession story on hold?
The chart below illustrates HH debt ratios plotted against NFC debt ratios for the BIS reporting nations with the highest levels of private sector indebtedness for 1Q22 and 1Q23 (excluding Hong Kong and Luxembourg).
HH debt ratios (% GDP, y-axis) plotted against NFC debt ratios (% GDP, x-axis) for selected BIS reporting economies with high private sector debt levels (Source: BIS; CMMP)
As can be seen, China and, to a much lesser extent Japan, stands out due to the fact that both debt ratios rose over the period.
In China’s case, the NFC debt ratio rose from 156% GDP to 165% GDP over the period while the HH debt ratio rose very slightly from 61% GDP to 62% GDP. In Japan, the NFC debt ratio rose from 67.9% GDP to 68.1% GDP while the HH debt ratio rose from 116.5% GDP to 117.1% GDP – marginal changes.
NFC debt ratios also rose in Korea and Denmark but the more common trend was for both ratios to fall over the period – see Switzerland, Sweden, France, Canada, the Netherlands, Norway and Belgium (in chart above).
These trends put the China balance sheet recession story on hold, at least for the time being. But, note…
Trends in Japanese, Spanish and Chinese private sector debt ratios (Source: BIS; CMMP)
The chart above (one of my favourites since 2017) illustrates trends in private sector debt ratios for Japan, Spain and China since 1981. In 1Q23, China’s private sector debt ratio hit a new high of 227% GDP. This is the same level reached at the peak of Spain’s debt bubble in 2Q10 and 13ppt higher than Japan’s peak back in 4Q94.
Trends in Japanese, Spanish and Chinese bank credit to debt ratios (Source: BIS; CMMP)
As noted before, the level of bank credit to GDP is much higher in China than in other “bubble phases”, leaving the country’s banks relatively exposed (see chart above). At the end of 1Q23, China’s bank credit to GDP ratio hit a new high of 192% GDP, well in excess of the peaks recorded in Spain (168% GDP, 2Q10) and Japan (117% GDP, 1Q90).
Trend in China’s private sector debt service ratio since 1999 (Source: BIS, CMMP)
Affordability risks also hit a new high, with a debt service ratio of 21.3%, 5.5ppt above its long-term average of 15.8% (see chart above). Note that China’s private sector is unique among BIS reporting nations in terms of the DSR being at a peak level, although the debt service ratios of the HH sectors in Canada, Korea and Sweden are also at new highs too.
Conclusion
With growth slowing, China appears to be reverting to higher levels of corporate credit as a solution, at least in the short term. The risks associated with this familiar strategy remain high. If successful, however, it would represent a unique chapter in the history of global debt dynamics.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.