“Update required – Part III”

The key chart

The key message

This is the second chart from 2017 that needs updating. It follows directly from the first chart that illustrated how China was following in the footsteps of Japan and Spain in terms of private sector debt dynamics (see “Update required – Part I”).

The purpose of the second chart was to contrast the exposure of Spanish and Chinese banks to private sector indebtedness with the exposure of Japanese banks at the time of the Japanese debt bubble in the 1990s. It illustrated trends in bank credit to the private non-financial sector expressed as a percentage of GDP.

Japanese private sector indebtedness peaked in 4Q94 at 214% GDP. At the time, bank credit was 112% GDP, or 52% of total private sector debt. In other words, banks and investors largely shared Japanese private sector debt risks equally (see chart above).

In contrast, when Spanish private sector indebtedness peaked at 227% in 2Q10, bank credit was 168% GDP, or 74% of total private sector debt (see chart below).

When I first published the chart above, Chinese private sector indebtedness was 202% of GDP. Bank credit was 157% GDP, or 77% of total private sector debt (see chart above).

In short, Spanish and Chinese banks were more exposed to excess private sector indebtedness than their Japanese peers had been before them. This reflected not only the relatively high level of indebtedness, but also the relatively important roles played by Spanish and Chinese banks in terms of the supply of credit to the private sector.

This leads to two obvious questions:

1. What has happened to China’s private sector debt dynamics subsequently and how exposed is the banking sector today?
2. How exposed are the Swedish, French, Korean and Canadian banking sectors to the elevated private sector indebtedness levels, highlighted in “Update required – Part II”?