The key chart
Trends in “excess credit growth” in China since June 2013 (Source: BIS; CMMP)
The key message
Whisper it softly (III), but all sectors of the Chinese economy are increasing their levels of indebtedness still.
The Chinese government is the main driver here, rather than the private sector, however. The rate of private sector “excess credit” generation has slowed markedly (see key chart above). With a (private sector) balance sheet recession still a risk (if not a reality yet), these trends can be expected to continue.
According to the latest BIS date release, China’s total, government, household (HH), corporate (NFC) and private sector (PS) debt ratios all hit new highs in 2Q23 (308%, 79%, 62%, 166% and 228% GDP respectively). China now accounts for 23% of total global debt, 26% of global PS debt and 32% of global NFC debt. In June 2009, these shares were only 7%, 8% and 12% respectively.
A key dynamic to note here, however, is the rate of growth in debt or “excess credit” generation. At times, this can be as important, if not more important than the level of debt/indebtedness. The key chart above illustrates the 3Y CAGR in government, HH and NFC debt in relation to the 3Y CAGR in nominal GDP.
Three distinct phases are visible – the first (1) includes the period of excess HH, NFC and government credit growth; the second (2) includes the period of excess HH and government debt, and the third (3 and current phase) includes excess government credit growth but much slower rates of HH and NFC excess credit growth.
At the start of 2023, I posed the question, “what if China’s private sector turns to debt minimisation/savings maximisation instead?” Or, “what if China experiences as balance sheet recession?”
As noted later in September 2023, the “balance sheet recession” story is still on hold, at least for the time being. Although it did become part of the 1H23 investment narrative briefly. Nonetheless, the dynamics of money creation and potential growth are shifting clearly. Credit rating agencies may (mistakenly) wish to see lower levels of government debt in China, but if current dynamics continue it will be fiscal policy/government spending that will have to do the “heavy lifting” if China’s growth is to recover.
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.