Chart: China's Debt Bomb
Connect with us

Markets

China’s Debt Bomb: No One Really Knows the Payload [Chart]

Published

on

China's Debt Bomb [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.

Explosive Materials

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.

Subscribe to Visual Capitalist
Click for Comments

Markets

Charted: U.S. Consumer Debt Approaches $16 Trillion

Robust growth in mortgages has pushed U.S. consumer debt to nearly $16 trillion. Click to gain further insight into the situation.

Published

on

Charted: U.S. Consumer Debt Approaches $16 Trillion

According to the Federal Reserve (Fed), U.S. consumer debt is approaching a record-breaking $16 trillion. Critically, the rate of increase in consumer debt for the fourth quarter of 2021 was also the highest seen since 2007.

This graphic provides context into the consumer debt situation using data from the end of 2021.

Housing Vs. Non-Housing Debt

The following table includes the data used in the above graphic. Housing debt covers mortgages, while non-housing debt covers auto loans, student loans, and credit card balances.

DateHousing Debt
(USD trillions)
Non-Housing Debt
(USD trillions)
Total Consumer Debt
(USD trillions)
Q1 20035.182.057.23
Q2 20035.342.047.38
Q3 20035.452.107.55
Q4 20035.962.108.06
Q1 20046.172.138.30
Q2 20046.342.128.46
Q3 20046.642.208.84
Q4 20046.832.229.05
Q1 20057.012.199.20
Q2 20057.232.269.49
Q3 20057.452.359.80
Q4 20057.672.3410.01
Q1 20068.022.3610.38
Q2 20068.352.4010.75
Q3 20068.652.4611.11
Q4 20068.832.4811.31
Q1 20079.032.4611.49
Q2 20079.332.5311.86
Q3 20079.562.5812.14
Q4 20079.752.6312.38
Q1 20089.892.6512.54
Q2 20089.952.6512.60
Q3 20089.982.6912.67
Q4 20089.972.7112.68
Q1 20099.852.6812.53
Q2 20099.772.6312.40
Q3 20099.652.6212.27
Q4 20099.552.6212.17
Q1 20109.532.5812.11
Q2 20109.382.5511.93
Q3 20109.282.5611.84
Q4 20109.122.5911.71
Q1 20119.182.5811.76
Q2 20119.142.5811.72
Q3 20119.042.6211.66
Q4 20118.902.6311.53
Q1 20128.802.6411.44
Q2 20128.742.6411.38
Q3 20128.602.7111.31
Q4 20128.592.7511.34
Q1 20138.482.7511.23
Q2 20138.382.7711.15
Q3 20138.442.8511.29
Q4 20138.582.9411.52
Q1 20148.702.9611.66
Q2 20148.623.0211.64
Q3 20148.643.0711.71
Q4 20148.683.1611.84
Q1 20158.683.1711.85
Q2 20158.623.2411.86
Q3 20158.753.3112.06
Q4 20158.743.3712.11
Q1 20168.863.3912.25
Q2 20168.843.4512.29
Q3 20168.823.5412.36
Q4 20168.953.6312.58
Q1 20179.093.6412.73
Q2 20179.143.6912.83
Q3 20179.193.7712.96
Q4 20179.323.8213.14
Q1 20189.383.8513.23
Q2 20189.433.8713.30
Q3 20189.563.9513.51
Q4 20189.534.0113.54
Q1 20199.654.0213.67
Q2 20199.814.0613.87
Q3 20199.844.1313.97
Q4 20199.954.2014.15
Q1 202010.104.2114.31
Q2 202010.154.1214.27
Q3 202010.224.1414.36
Q4 202010.394.1714.56
Q1 202110.504.1414.64
Q2 202110.764.2014.96
Q3 202110.994.2415.23
Q4 202111.254.3415.59

Source: Federal Reserve

Trends in Housing Debt

Home prices have experienced upward pressure since the beginning of the COVID-19 pandemic. This is evidenced by the Case-Shiller U.S. National Home Price Index, which has increased by 34% since the start of the pandemic.

Driving this growth are various pandemic-related impacts. For example, the cost of materials such as lumber have seen enormous spikes. We’ve covered this story in a previous graphic, which showed how many homes could be built with $50,000 worth of lumber. In most cases, these higher costs are passed on to the consumer.

Another key factor here is mortgage rates, which fell to all-time lows in 2020. When rates are low, consumers are able to borrow in larger quantities. This increases the demand for homes, which in turn inflates prices.

Ultimately, higher home prices translate to more mortgage debt being incurred by families.

No Need to Worry, Though

Economists believe that today’s housing debt isn’t a cause for concern. This is because the quality of borrowers is much stronger than it was between 2003 and 2007, in the years leading up to the financial crisis and subsequent housing crash.

In the chart below, subprime borrowers (those with a credit score of 620 and below) are represented by the red-shaded bars:

Mortgage originations by Credit Score

We can see that subprime borrowers represent very little (2%) of today’s total originations compared to the period between 2003 to 2007 (12%). This suggests that American homeowners are, on average, less likely to default on their mortgage.

Economists have also noted a decline in the household debt service ratio, which measures the percentage of disposable income that goes towards a mortgage. This is shown in the table below, along with the average 30-year fixed mortgage rate.

YearMortgage Payments as a % of Disposable IncomeAverage 30-Year Fixed Mortgage Rate
200012.0%8.2%
200412.2%5.4%
200812.8%5.8%
20129.8%3.9%
20169.9%3.7%
20209.4%3.5%
20219.3%3.2%

Source: Federal Reserve

While it’s true that Americans are less burdened by their mortgages, we must acknowledge the decrease in mortgage rates that took place over the same period.

With the Fed now increasing rates to calm inflation, Americans could see their mortgages begin to eat up a larger chunk of their paycheck. In fact, mortgage rates have already risen for seven consecutive weeks.

Trends in Non-Housing Consumer Debt

The key stories in non-housing consumer debt are student loans and auto loans.

The former category of debt has grown substantially over the past two decades, with growth tapering off during the pandemic. This can be attributed to COVID relief measures which have temporarily lowered the interest rate on direct federal student loans to 0%.

Additionally, these loans were placed into forbearance, meaning 37 million borrowers have not been required to make payments. As of April 2022, the value of these waived payments has reached $195 billion.

Over the course of the pandemic, very few direct federal borrowers have made voluntary payments to reduce their loan principal. When payments eventually resume, and the 0% interest rate is reverted, economists believe that delinquencies could rise significantly.

Auto loans, on the other hand, are following a similar trajectory as mortgages. Both new and used car prices have risen due to the global chip shortage, which is hampering production across the entire industry.

To put this in numbers, the average price of a new car has climbed from $35,600 in 2019, to over $47,000 today. Over a similar timeframe, the average price of a used car has grown from $19,800, to over $28,000.

Continue Reading

Markets

Why Investors Tuned Out Netflix

Disappointing results have pushed Netflix shares down by over 60% year-to-date. This infographic puts the company’s rocky year into perspective.

Published

on

Why Investors Tuned Out Netflix

Netflix shares have enjoyed an incredible run over the past decade. Subscriber growth seemed limitless, profitability was improving, and the pandemic gave us a compelling case for watching TV at home.

Things took a drastic turn on April 19, 2022, when Netflix announced its Q1 results. Rather than gaining subscribers as forecasted, the company lost 200,000. This was the first decline in over a decade, and investors rushed to pull their money out.

So, is there a buying opportunity now that Netflix shares are trading at multi-year lows? To help you decide, we’ve provided further context around this historic crash.

Netflix Shares Fall Flat

Over the span of a few months, Netflix shares have erased roughly four years worth of gains. Not all of these losses are due to the drop in subscribers, however.

Prior to the Q1 earnings announcement, Netflix had lost most of its pandemic-related gains. This was primarily due to rising interest rates and people spending less time at home. Still, analysts expected Netflix to add 2.7 million subscribers.

After announcing it had lost 200,000 subscribers instead, the stock quickly fell below $200 (the first time since late 2017). YTD performance (as of April 29, 2022) is an abysmal -67%.

What’s to Blame?

Netflix pointed to three culprits for its loss in subscribers:

  • The suspension of its services in Russia
  • Increasing competition
  • Account sharing

Let’s focus on the latter two, starting with competition. The following table compares the number of subscribers between Netflix and two prominent rivals: Disney+ and HBO.

DateNetflix Subscribers Disney+ Subscribers HBO & HBO Max Subscribers
Q1 2020182.8M26.5M53.8M
Q2 2020192.9M33.5M55.5M
Q3 2020195.1M60.5M56.9M
Q4 2020203.6M73.7M60.6M
Q1 2021207.6M94.9M63.9M
Q2 2021209.2M103.6M67.5M
Q3 2021213.6M116.0M69.4M
Q4 2021221.8M118.1M73.8M
Q1 2022221.6M129.8M76.8M

Disney+ was launched in November 2019, while HBO Max was launched in May 2020. HBO (the channel) and HBO Max subscribers are rolled up as one.

Based on this data, Netflix may be starting to feel the heat of competition. A loss in subscribers is bad news, but it’s even worse when competitors report growth over the same time period.

Keep in mind that we’re only talking about a single quarter, and not a long-term trend. It’s too early to say whether Netflix is actually losing ground, though the company has warned it could shed another 2 million subscribers by July.

Next is account sharing, which according to Netflix, amounts to 100 million non-paying households. This is spread out across the entire world, but if we use the company’s U.S. pricing as a benchmark, it translates to between $1 to $2 billion in lost revenue.

Growth is Everything

In the tech sector, growth is everything. If Netflix can’t return to posting consecutive quarters of subscriber growth, it could be many years before the stock returns to its previous high.

“We’ve definitely seen that once you get to 70, 80 millions of subs, things really tend to slow down. We saw it with HBO, and we’ve seen the same issues with Disney. They’re hitting the upper limit on the big growth.”
– David Campo, NYU

Regaining that momentum is going to be difficult, but Netflix does have plans. To address password sharing, the service may charge a fee for out-of-household profiles that are added to an account. The specifics around enforcement are vague, but Netflix is also considering a lower-priced subscription plan that includes advertising.

Only time will tell if these strategies can stop the bleeding, or perhaps even boost profitability. Rampant inflation, which might persuade consumers to cut down on their subscriptions, could be a source of additional headwinds.

Continue Reading

Subscribe

Popular