The key chart
(Source: BIS; CMMP)
The key message
In this final “Update required” post, I consider China’s private sector dynamics (post-2Q16) and the exposure of the banking sector to these dynamics (see, “Update required – Part III”). I highlight seven reasons why China dominates global debt dynamics today and illustrate them graphically.
- China has the largest outstanding stock of private sector debt globally ($39tr)
- China’s market share of private sector debt has increased to 27% from 20% in 2Q16 (and only 6% in 2Q08)
- In the process, China has eclipsed the “EM-debt” story – the share of EM ex-China has remained unchanged over the period
- China’s debt dynamic has shifted from excess growth in corporate debt (well-known) to excess growth in household debt (less well-known)
- The fact that the rate of growth matters, not just its level, is the first important lesson here
- The second is that affordability matters – China’s private sector debt service ratio is elevated in absolute terms and against historical trends
- With recent re-intermediation, the banking sector is relatively exposed to the risks associated with current debt dynamics. Bank sector debt ratios exceed the levels reached at the height of the Spanish private sector debt bubble, for example
Why China dominates global debt dynamics in charts
Chart 1: Size
(Source: BIS; CMMP)
Chart 2: Market share
(Source: BIS; CMMP)
Chart 3: Eclipsing the rest of EM
(Source: BIS; CMMP)
Chart 4: Shifting debt dynamics
(Source: BIS; CMMP)
Chart 5: Rising affordability risks
Chart 6: Re-intermediation…
(Source: BIS; CMMP)
Chart 7: How exposed is the banking sector?
(Source: BIS; CMMP)
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.