Seven reasons why China dominates global debt dynamics (in charts)
The key chart
Trends in private sector credit (US$ tr) (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 ($39tr)
China’s market share of private sector debt has increased to 27% from 20% in 2Q16 (and only 6% in 2Q08)
In the process, China has eclipsed the “EM-debt” story – the share of EM ex-China has remained unchanged over the period
China’s debt dynamic has shifted from excess growth in corporate debt (well-known) to excess growth in household debt (less well-known)
The fact that the rate of growth matters, not just its level, is the first important lesson here
The second is that affordability matters – China’s private sector debt service ratio is elevated in absolute terms and against historical trends
With recent re-intermediation, the banking sector is relatively exposed to the risks associated with current debt dynamics. Bank sector debt ratios exceed the levels reached at the height of the Spanish private sector debt bubble, for example
Why China dominates global debt dynamics in charts
Chart 1: Size
Top-ten BIS reporting economies ranked by stock of private sector credit (US$ tr) (Source: BIS; CMMP)
Chart 2: Market share
China’s share of total private sector, corporate (NFC) and household (HH) debt (% total) (Source: BIS; CMMP)
Chart 3: Eclipsing the rest of EM
Breakdown of global private sector by region (% total) (Source: BIS; CMMP)
Chart 4: Shifting debt dynamics
Trends in relative growth factors – 3Y CAGR in PSC versus 3Y CAGR in GDP (Source: BIS; CMMP)
Chart 5: Rising affordability risks
Selected debt service ratios – deviation from 10Y average (ppt) plotted against 2Q22 level (%) (Source: BIS; CMMP)
Chart 6: Re-intermediation…
Bank credit as %age of total private sector credit (Source: BIS; CMMP)
Chart 7: How exposed is the banking sector?
Comparison of PS and bank sector debt ratios – Spain versus China (Source: BIS; CMMP)
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
How exposed are banking sectors to elevated private sector credit risks?
The key chart
Trends in selected bank credit ratios (% GDP) (Source: BIS; CMMP)
The key message
How exposed are banking sectors to elevated private sector debt risks in Sweden, France, Korea, China and Canada?
Recall that these five economies have private sector debt ratios that exceed the “peak-bubble” level seen in Japan in 4Q94 and debt service ratios that are not only high in absolute terms but are also elevated in relation to their respective 10-year, average affordability levels. Twin warning signs.
The banking sectors in China and Korea have the highest exposures to elevated private sector debt risks among this sample (see key chart above):
China: bank credit accounts for 84% of total private sector credit and the bank credit ratio of 184% GDP exceeds the peak-Spanish bank credit ratio of 168% GDP;
Korea: bank credit accounts for 73% of total private sector credit. The bank credit ratio of 161% GDP is slightly below the peak-Spain level but well above the peak-Japan level of 112%.
Selected private sector credit ratios (% GDP) broken down by bank and non-bank credit (Source: BIS; CMMP)
In contrast, risks in Sweden, France and Canada are shared more equally between banks and investors (see chart above). Bank sector credit accounts for 51%, 50% and 49% of total private sector credit in Sweden, Canada and France respectively (reflecting the greater development of alternative sources of credit in advanced economies).
This does not mean that banks are not exposed, however. The bank credit ratio in Sweden is 138% GDP, above the peak-Japan level. In France and Canada these ratios are the same or slightly below the peak-Japan level (112% GDP and 109% GDP respectively).
In short, risks remain real and elevated. In a world, that sees public sector debt as a problem but largely ignores private sector debt, this matters, or at least it should do…
Please note that the comments and charts above are abstracts from more detailed research that is available separately.
Trends in bank credit to the private non-financial sector in Japan, Spain and China (% GDP) (Source: BIS; CMMP)
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.
Trends in Japanese PS debt ratio (% GDP) and Bank credit to PS ratio (% GDP) (Source: BIS; CMMP)
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).
Trends in Spanish and Chinese PS debt ratios (% GDP) and Bank credit to PS ratios (% GDP) (Source: BIS; CMMP)
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:
What has happened to China’s private sector debt dynamics subsequently and how exposed is the banking sector today?
How exposed are the Swedish, French, Korean and Canadian banking sectors to the elevated private sector indebtedness levels, highlighted in “Update required – Part II”?
While the private sector is deleveraging (passively) at the global level, elevated risks remain in Sweden, France, Korea, China and Canada. Unfortunately, these risks may be overlooked in a world that sees public sector debt as a problem but largely ignores private sector debt. That would be a mistake.
Why focus on Sweden, France, Korea, China and Canada?
First, their levels of private sector indebtedness exceed the “peak-bubble” level seen in Japan (214% GDP, 4Q94) and, in the cases of Sweden and France, the peak-bubble level seen in Spain (227% GDP, 2Q10) too. Potential warning sign #1.
Second, in contrast to other economies that exhibit high levels of private sector indebtedness (eg, the Netherlands, Denmark, and Norway) affordability risks are also elevated in these five highlighted economies. Their debt service ratios are not only high in absolute terms (>20% income), they are also elevated in relation to their respective 10-year, average affordability levels. Potential warning sign #2.
Note, finally, that among these five economies, Sweden, Korea and Canada have over-indebted NFC and HH sectors, while the risks in France and China relate more, but not exclusively, to their NFC sectors. When it comes to private sector debt dynamics, the world is far from a homogenous place…
Update required – Part II
Trends in global private sector debt ($tr) and debt ratio (% GDP, RHS) (Source: BIS; CMMP)
Global private sector indebtedness (debt % GDP) fell between 2Q21 (172% GDP) and 2Q22 (160% GDP) according to the latest BIS data release (5 December 2022).
This was a form of passive deleveraging ie, total debt increased over the period (from $142tr to $143tr) but at a slower pace that nominal GDP (see chart above). Both corporate (NFC) and household (HH) debt ratios fell over the period.
Private sector debt ratios (% GDP) as at the end of 2Q22 (Source: BIS; CMMP)
While China ($39tr) and the US ($38tr) collectively account for 54% of total private sector debt, they rank only #9 and #22 in terms of indebtedness. As noted many times before, debt and indebtedness are not the same things.
The most indebted private sectors among the BIS reporting economies are Luxembourg, Hong Kong, Switzerland, Sweden, the Netherlands, France, Denmark, South Korea, China, Canada. Norway and Singapore. In each case, private sector credit exceeded 200% of GDP at the end of 2Q22 (see chart above).
HH debt ratios (% GDP) plotted against NFC debt ratios for 2Q21 and 2Q22 (Source: BIS; CMMP)
This highlighted group of relatively indebted private sectors are far from homogenous, however:
Luxembourg, Hong Kong, Singapore and Switzerland have unique “financial roles” that differentiate them from the other economies, for example;
Among the remaining nations only China and South Korea experienced increases in both NFC and HH indebtedness between 2Q21 and 2Q22;
All of them have relatively indebted NFC sectors (NFC debt >90% GDP), but Switzerland, the Netherlands, Denmark, Korea and Canada also have “overly-indebted” HH sectors (HH debt > 85% GDP)
In contrast, France, China, Norway and Singapore have “overly indebted” NFC sectors, but less elevated HH debt ratios
Returning to the theme of history repeating itself and/or rhyming, I have chosen to highlight private sector dynamics in Sweden, France, South Korea, China and Canada for two reasons – their level of private sector indebtedness in relation to trends observed during debt bubbles in Japan and Spain, and their associated and elevated affordability risks.
Private sector debt levels peaked at 214% GDP in Japan and 227% GDP in Spain at the height of their respective private sector debt bubbles (in 4Q94 and 3Q10 respectively).
At the end of 2Q22, private sector debt levels in Sweden (269% GDP) and France (231% GDP) exceeded the peak levels in both Spain and Japan while the private sector debt levels in Korea (222% GDP), China (220% GDP) and Canada (220% GDP) exceeded the peak level in Japan but remained below the Spanish peak.
Note again that among these five economies, Sweden, Korea and Canada have over-indebted NFC and HH sector, while the risks in France and China and relate more, but not exclusively, to their NFC sectors.
Debt service ratios – deviation from 10Y ave versus current level as at end 2Q22 (Source: BIS; CMMP)
Private sector debt service ratios in Sweden, Canada, South Korea, France and China are not only high in absolute terms (ie, > 20%), but they also exceed their 10-year average levels. In contrast, while DSRs in the Netherlands, Norway and Denmark appear relatively high in absolute terms, there are below their respective 10-year averages. Note that due to comparability issues between DSR calculations, the BIS prefers to focus on deviations from LT averages when assessing affordability risks.
Conclusion
While the private sector is deleveraging (passively) at the global level, elevated risks remain in Sweden, France, Korea, China and Canada. Unfortunately, these risks may be overlooked in a world that sees public sector debt as a problem but largely ignores private sector debt. That would be a mistake.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
History rhymes – but this chart still needs refreshing
“The key chart”
Trends in Japanese, Spanish and Chinese private sector debt % GDP ratios (Source: BIS; CMMP)
The key message
I published this chart for the first time in 2017 to ask whether history was repeating itself in terms of private sector indebtedness – was China following in the footsteps of Japan and Spain?
It was also an opportunity to flag the rapid rise in household (HH) debt in China (see also, “Too much, too soon“), and to highlight the risks associated with rapid rates of growth in debt (see also, “Beyond the headlines“)
These trends and risks are understood better today (and the same chart has been reproduced many times by different people) – but the chart is in urgent need of an update. The reasons will be revealed later today when the BIS releases its 2Q22 update of global credit…
1Q22 Public and private sector debt ratios (%GDP) by country (Source: BIS; CMMP)
The key message
With global debt levels at a new, record high of $230 trillion and questions regarding debt sustainability dominating headlines, there are three key risks associated with popular investment narratives. The first is to treat the level of debt and the level of indebtedness synonymously. The second is to ignore the key structural shifts in global debt that have taken place since the GFC. The third is to dismiss the considerable differences that exist between the breakdown and level of indebtedness at the country level. The final risk is compounded by the fact that conventional macroeconomics typically ignores private sector debt while seeing public debt as a problem.
Debt versus indebtedness
While the level of total debt is at a new high, the level of indebtedness (261% GDP) is 30ppt below its 4Q20 peak (291% GDP). Similarly at the country level, the US and China collectively account for just over half of outstanding global debt but neither rank among the top-ten most indebted global economies. In contrast, Japan and France both rank among the top-five global economies in terms of their share of total debt and their level of indebtedness – yet, how often is France included in debates over debt sustainability?
Structural shifts
The first important structural shift in the post GFC period is the one away from relatively high-risk household (HH) debt towards lower-risk government debt driven largely by US and UK debt dynamics. The second is the “apparent” shift towards EM debt. In reality, this is a China-debt story rather than an EM debt story, however. EM ex-China’s share of global debt is largely unchanged since the GFC.
Country-level differences
Finally, considerable differences exist between the breakdown and levels of global debt ratios at the country level. Six of the 43 BIS reporting nations have above average private and public sector debt ratios – Japan, Singapore, France, Canada, Belgium and Portugal. A further 14 reporting nations have above average private sector debt ratios but below average public sector debt ratios – Hong Kong, Luxembourg, Sweden, Switzerland, the Netherlands, Denmark, Norway, South Korea, China, Ireland, Australian, Finland, Thailand, and New Zealand.
The key point here is that conventional macroeconomics typically ignores private debt while seeing public sector debt as a problem.
Note in this context, the emphasis that is typically placed on debt sustainability in the US, UK, and Italy despite the fact that these three nations are among the six reporting nations that exhibit above average levels of public debt but below average levels of private sector debt.
As noted previously, the US, Italy and Germany are also the only three advanced economies that have both household and corporate debt ratios below the levels that the BIS consider detrimental to future growth. A topic that I will return to in subsequent posts on private sector debt dynamics.
1Q22 Global debt dynamics – the charts that matter
Debt versus indebtedness
Trends in total debt (USD billions, LHS) and debt ratios (%GDP, RHS) since 1Q08 (Source: BIS; CMMP)
The outstanding stock of global debt hit a new, record high of $230 trillion at the end of 1Q22, according the latest BIS statistics (see chart above). The level of global indebtedness, expressed as the level of debt to GDP, has fallen from its 4Q20 peak of 291% GDP to 261% GDP, however.
Note that the level of debt and the level of indebtedness are not synonymous.
Top-ten ranking of BIS reporting nations by total debt (USD billions, LHS) and cumulative market share (%, RHS) as at end 1Q22 (Source: BIS; CMMP)
The US and China collectively account for over half of global debt but neither economy ranks among the top-ten most indebted global economies. At the end of 1Q22, the US and China accounted for 28% and 23% of the outstanding stock of global debt respectively (see chart above). In terms of indebtedness, the US and China rank only #16 and #13 globally, however (see chart below).
In contrast, Japan and France both rank among the top-five global economies in terms of their share of total debt (see chart above) and their level of indebtedness (see chart below) – yet, how often is France included in debates over debt sustainability?
Top-ten ranking of BIS reporting countries by total debt ratio (% GDP) (Source: BIS; CMMP)
Structural shifts
The first important structural shift in the post GFC period is the one away from relatively high-risk HH debt towards lower-risk government debt driven largely by US and UK debt dynamics. At the end of 1Q08, corporate (NFC), HH and government debt accounted for 38.7%, 31.5% and 29.9% of total debt respectively. At the end of 1Q21, these respective market shares were 38.7%, 24.9% and 36.5%. In other words, while the share of NFC corporate data remains unchanged there has been a clear shift away from HH to government debt.
Structural shifts in global debt (% total) since 1Q08 (Source: BIS; CMMP)
As highlighted in “Challenging flawed narratives” earlier this month, the structure of US debt is now the mirror image of its pre—GFC structure. This follows the shift away from HH debt towards government debt and the passive deleveraging of the US HH sector (see charts below repeated from previous post).
Shares of outstanding US non-financial debt by sector (Source: FED; CMMP)Trends in US HH debt ($ tr) and HH debt ratio (% GDP) (Source: FED; CMMP)
The second is the “apparent” shift towards EM debt. At the end of 1Q08, advanced economies and emerging markets accounted for 84% and 16% of outstanding global debt respectively. At the end of 1Q22, these respective shares had changed to 64% and 36% (see graph below).
Trends in advanced and emerging markets shares of total debt (% total) (Source: BIS; CMMP)
In reality, this is a China-debt story rather than an EM debt story, however. EM ex-China’s share of global debt is largely unchanged since the GFC. In contrast, China’s share of total global debt has increased from 5% at the end of 1Q08 to 23% at the end of 1Q21 (see chart below and “Global debt dynamics – V“)
Trends in China and EM ex-China market shares of total debt (% total) (Source: BIS; CMMP)
Country-level differences
Finally, considerable differences exist between the breakdown and levels of global debt ratios at the country level (see chart below). Six of the 43 BIS reporting nations have above average private and public sector debt ratios – Japan, Singapore, France, Canada, Belgium and Portugal (the top RH quadrant). A further 14 reporting nations have above average private sector debt ratios but below average public sector debt ratios – Hong Kong, Luxembourg, Sweden, Switzerland, the Netherlands, Denmark, Norway, South Korea, China, Ireland, Australian, Finland, Thailand, and New Zealand (the top LH quadrant).
The key point here is that conventional macroeconomics typically ignores private debt while seeing public sector debt as a problem.
1Q22 Public and private sector debt ratios (%GDP) by country (Source: BIS; CMMP)
Note in this context, the emphasis that is typically placed on debt sustainability in the US, UK, and Italy despite the fact that these three nations are among the six reporting nations that exhibit above average levels of public debt but below average levels of private sector debt (the bottom RH quadrant above).
As noted previously, the US, Italy and Germany are also the only three advanced economies that have both household and corporate debt ratios below the levels that the BIS consider detrimental to future growth. A topic that I will return to in subsequent posts on private sector debt dynamics.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Total debt ($bn) and debt ratios (% GDP) for EM’s five largest debt markets (Source: BIS; CMMP)
The key message
Following recent analysis of global and emerging market (EM) debt dynamics and in advance of the Indian government’s announcement of its annual budget on 1 February 2022, this post summarises seven key structural features of Indian debt dynamics.
India is the third largest EM debt market in terms of total, private sector (PSC), corporate (NFC), and household (HH) debt after China and Korea and ahead of Brazil and Russia. Beyond absolute size, the key features of Indian debt dynamics include:
PSC accounts for a relatively low share (51%) of total debt. In this context, India ranks #15 among our sample of 21 EM economies
In terms of the private versus public sector breakdown, India is similar to Brazil but very different to Russia, Korea and China
This matters because risks associated with elevated private sector debt are greater than those associated with public sector debt
While Indian debt markets are large in absolute terms, the level of indebtedness is relatively low. Both the NFC (55% GDP) and HH (36% GDP) debt ratios are below both EM averages and BIS threshold limits
Indian debt ratios are also relatively low in an historic context. HH indebtedness peaked at 43% GDP in 3Q07 while NFC indebtedness peaked at 71% GDP in 4Q12 (n.b. debt levels and levels of indebtedness are very different measures!)
India has experienced periods of elevated risks associated with excess credit growth in the (not-so-distant) past – first in the NFC sector (until 4Q14) and then in the HH sector (since 3Q19). Current risks are moderate, however, in both sectors with RGFs below recent peaks
Affordability risks in India are also relatively low in EM, global and historic contexts. India’s PS debt service ratio of 10% is well below its 10Y average of 13%
These features re-enforce the conclusion of “Global Debt Dynamics – V” that it is time to “replace the EM debt story with individual EM country debt stories.” Debt dynamics and their implications for policy, investment decisions and financial stability differ markedly even among EM’s five largest markets.
In short, India scores relatively well in terms of the risks associated with structure, indebtedness, growth and affordability of debt.
The India debt story
Size
Total debt ($bn) and debt ratios (% GDP) for EM’s five largest debt markets (Source: BIS; CMMP)
India is the third largest EM debt market in terms of total ($4,656bn), PSC ($2,550bn), NFC (£1,540bn) and HH debt ($1,011bn) after China and Korea and ahead of Brazil and Russia (see chart above).
Structure
PSC debt as % of total debt for EM’s five largest debt markets (Source: BIS; CMMP)
A key feature of the structure of Indian debt is the relatively low share of private sector debt (51% total). In this context, India ranks #15 among the 21 BIS EM reporting economies. In other words, the private versus public sector breakdown of India debt is similar to Brazil but very different to Russia, Korea, and China (see chart above).
This matters because risks associated with elevated private sector debt are greater than those associated with elevated public sector debt.
Indebtedness
HH and NFC debt ratios for EM economies (Source: BIS; CMMP)
While India is a large debt market in absolute terms, the level of indebtedness is relatively low in an EM context (see above). In terms of PSC (90% GDP), NFC (55% GDP) and HH (36% GDP) debt ratios, India ranks #11, #12, and #10 respectively. Both the NFC and HH debt ratios are below the EM averages (dotted blue line) and the BIS threshold limits (dotted red line).
Trends in Indian PSC, NFC and HH debt ratios (% GDP) (Source: BIS; CMMP)
Indian debt ratios are also relatively low in an historic context. The HH debt ratio of 36% GDP is 7ppt below the 43% GDP peak reached back in 3Q07. The NFC debt ratio of 55% GDP is 16ppt below the 71% GDP peak reached in 4Q12, the point at which the PSC debt ratio also peaked at 106% GDP (see graph above).
NFC snapshot
NFC sector snapshot (Source: BIS; CMMP)
At the end of 2Q21, the level of outstanding NFC debt was $1,540bn, $39bn below the peak level recorded in the previous quarter. As noted above, India is the third largest NFC debt market in absolute terms with a market share of 4%. In terms of NFC indebtedness, however, India ranks #12 among the EM universe. NFC’s share of total debt (31%) is also relatively low. In this context, India ranks #14 among the EM universe.
HH snapshot
HH sector snapshot (Source: BIS; CMMP)
The level of outstanding HH debt was $1,010bn at the end of 2Q21, again £26bn below the peak level recorded in the previous sector. India is the third largest HH debt market in our EM universe with a market share of 6%. In terms of indebtedness, however, India ranks #10 among our EM universe. HH debt represents a relatively low 20% of total debt. In this context, India ranks #12 among our EM universe. In other words, the HH and NFC sectors share a number of similar characteristics.
In terms of risks to macro policy, investment decisions and financial stability, the lesson from EM history is that the rate of excess credit growth can be as important as the level of indebtedness.
The risks associated with excess credit growth in India are relatively low in an EM context (see chart) above and in an historic context. The latest PSC RGF of 1.8% is lower than the EM average of 6.0% and the levels for China (2.3%), Korea (5.8%), Brazil (6.2%) and Russia (2.2%), countries with higher of similar (Brazil) PSC debt ratios.
Trends in HH, NFC and PSC relative growth factors (Source: BIS; CMMP)
In the post-GFC period, India has experienced periods of elevate growth risks, first in the NFC sector and then in the HH sector. Over the past five years, these risks have been concentrated in the HH sector but rose more recently in the NFC sector again (see chart above). Note however, the rates of excess growth rates have peaked in both cases (and remain modest in absolute terms).
Affordability
EM debt service ratios (x-axis) and deviations from LT average (y-axis) (Source: BIS; CMMP)
Affordability risks in India are also relatively low in an EM and global context and in an historic Indian context. The chart above plots the latest debt service ratios (DSR) for BIS reporting economies (x-axis) and the deviation of each DSR from its LT average. As can be seen India has a relatively low DSR of 9.8%, well below its 10-year average of 12.5% (see also chart below).
Trends in Indian PSC debt service ratio (Source: BIS; CMMP)
Conclusion
These features re-enforce the conclusion of “Global Debt Dynamics – V” that it is time to “replace the EM debt story with individual EM country debt stories.”
Financial stability heatmap for EM’s five largest debt markets (Source: BIS; CMMP)
Debt dynamics and their implications for policy, investment decisions and financial stability differ markedly even among EM’s five largest markets, for example (see the summary heatmap above).
In short, India scores relatively well in terms of risks associated with structure, indebtedness, growth and affordability of debt (n.b. the lack of red shading in the heatmap above in relation to India).
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
