China’s Debt Bomb: No One Really Knows the Payload [Chart]
China’s Debt Bomb [Chart]
No One Knows if its a Hand Grenade or a Nuclear Explosion
The Chart of the Week is a weekly Visual Capitalist feature on Fridays.
The ramp up in Chinese debt accumulation has been a leading concern of investors for years. The average total debt of emerging market economies is 175% of GDP, and skyrocketing corporate non-financial debt has launched China far beyond that number.
The real question is: by how far?
The answer is disconcerting, because nobody really knows.
If the Chinese debt bomb is detonated, the impact on markets is anybody’s guess. Kyle Bass says the losses would be 5x that of the subprime mortgage crisis, while Moody’s says the bomb will be safely disarmed by authorities far before it goes off.
In today’s chart, we look at various estimates to the size of China’s debt bomb, its payload, and what might spark the fuse.
China’s Debt Bomb: The Payload
Mckinsey came out with a widely-publicized estimate of China’s debt at the beginning of 2015. Using figures up to Q2 2014, they estimated that total Chinese debt was 282% of GDP, an increase from 158% in 2007.
Since then, various trusted organizations have come up with follow-up estimates.
On the low end, Goldman Sachs came out with an estimate in January 2016 of 216% total debt-to-GDP for 2015. (A few months later, they put out a separate report saying that total debt-to-GDP was estimated to be closer to 270% for 2016.)
On the high end, Macquarie analyst Viktor Shvets said that China’s debt was $35 trillion, or “nearly 350%” of GDP.
The truth is that it’s anybody’s guess. China’s official estimates are fairly useless, and the country has a massive and quickly evolving shadow banking sector that complicates these projections significantly.
Total debt is made up of various components, including government, corporate, banking, and household debts.
In the case of China, it is corporate debt that is particularly explosive. According to Mckinsey, the country’s corporate sector already has a higher debt-to-GDP than the United States, Canada, South Korea, or Germany, even while still being considered an “emerging market”.
S&P Global Ratings now figures that Chinese corporate debt is in the 160% range, up from 98% in 2008. The current number in the United States is a less ominous 70%.
China’s central bank is just as concerned as anyone else. Here’s what the Governor of the People’s Bank of China, Zhou Xiaochuan, had to say about a month ago:
Lending as a share of GDP, especially corporate lending as a share of GDP, is too high.
Xiaochuan also noted that a high leverage ratio is more prone to macroeconomic risk.
Defusing the Bomb
If there’s something that can ignite the fuse of China’s debt bomb, it’s non-performing loans (NPLs).
An NPL is a sum of money borrowed upon which the debtor has not made scheduled payments. They are essentially loans that are either close to defaulting, or already in default territory.
China has an official estimate for this number, and it is a benign 1.7% of debt. Unfortunately, independent researchers peg it much higher.
Bullish analysts have the number pegged in the high single-digits, while bearish analysts put the range anywhere between 15% and 21%. Even the IMF says that loans “potentially at risk” would be equal to 15.5% of total commercial lending.
If there’s a place to start defusing the bomb, this is it.
Charted: Public Trust in the Federal Reserve
Public trust in the Federal Reserve chair has hit its lowest point in 20 years. Get the details in this infographic.
- Gallup conducts an annual poll to gauge the U.S. public’s trust in the Federal Reserve
- After rising during the COVID-19 pandemic, public trust has fallen to a 20-year low
Charted: Public Trust in the Federal Reserve
Each year, Gallup conducts a survey of American adults on various economic topics, including the country’s central bank, the Federal Reserve.
More specifically, respondents are asked how much confidence they have in the current Fed chairman to do or recommend the right thing for the U.S. economy. We’ve visualized these results from 2001 to 2023 to see how confidence levels have changed over time.
Methodology and Results
The data used in this infographic is also listed in the table below. Percentages reflect the share of respondents that have either a “great deal” or “fair amount” of confidence.
|Year||Fed chair||% Great deal or Fair amount|
Data for 2023 collected April 3-25, with this statement put to respondents: “Please tell me how much confidence you have [in the Fed chair] to recommend the right thing for the economy.”
We can see that trust in the Federal Reserve has fluctuated significantly in recent years.
For example, under Alan Greenspan, trust was initially high due to the relative stability of the economy. The burst of the dotcom bubble—which some attribute to Greenspan’s easy credit policies—resulted in a sharp decline.
On the flip side, public confidence spiked during the COVID-19 pandemic. This was likely due to Jerome Powell’s decisive actions to provide support to the U.S. economy throughout the crisis.
Measures implemented by the Fed include bringing interest rates to near zero, quantitative easing (buying government bonds with newly-printed money), and emergency lending programs to businesses.
Confidence Now on the Decline
After peaking at 58%, those with a “great deal” or “fair amount” of trust in the Fed chair have tumbled to 36%, the lowest number in 20 years.
This is likely due to Powell’s hard stance on fighting post-pandemic inflation, which has involved raising interest rates at an incredible speed. While these rate hikes may be necessary, they also have many adverse effects:
- Negative impact on the stock market
- Increases the burden for those with variable-rate debts
- Makes mortgages and home buying less affordable
Higher rates have also prompted many U.S. tech companies to shrink their workforces, and have been a factor in the regional banking crisis, including the collapse of Silicon Valley Bank.
Where does this data come from?
Source: Gallup (2023)
Data Notes: Results are based on telephone interviews conducted April 3-25, 2023, with a random sample of –1,013—adults, ages 18+, living in all 50 U.S. states and the District of Columbia. For results based on this sample of national adults, the margin of sampling error is ±4 percentage points at the 95% confidence level. See source for details.
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