The key chart
(Source: BIS; CMMP)
The key message
The “China re-opening” story that suggests that the easing of COVID restrictions will unleash pent-up demand for commodities, consumer goods and travel has received a great deal of attention at the start of 2023.
A key element of this narrative is the $836bn of excess savings that Chinese consumers are reported to have built up during the pandemic. Will these savings be unleashed in a consumption and travel boom? Quite possibly, but what are the wider risks to this positive narrative?
The biggest, unspoken (so far) risks are the level of private sector debt, the growth of household debt and the affordability of private sector debt. What happens, for example, if rather than seeking to maximise profit/utility as traditional economics assumes, the Chinese private sector turns to minimizing debt or maximising savings instead? What if China experiences a balance sheet recession?
Recall that China is one of five economies where (1) private sector indebtedness (220% GDP) exceeds the “peak-bubble” level seen in Japan (214% GDP, 4Q94) and (2) the debt service ratio is not only high in absolute terms, but is also elevated in relation to its 10-year average. China’s debt dynamic has shifted from excess growth in corporate debt (well-known) to excess credit growth in household debt (less well-known). With recent re-intermediation, the banking sector is also 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.
In short, China’s debt dynamics point to potential demand (debt minimisation) and supply side (bank sector debt) constraints to future consumption. At the very least, these factors need to be included in the investment narrative.
Do not forget the lessons from both Japan and Spain’s balance sheet recessions…
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.