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

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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.

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Markets

The Top Google Searches Related to Investing in 2022

What was on investors’ minds in 2022? Discover the top Google searches and how the dominant trends played out in portfolios.

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Trend lines showing when the top Google searches related to investing reached peak popularity over the course of 2022.
The following content is sponsored by New York Life Investments

The Top Google Searches Related to Investing in 2022

It was a turbulent year for the markets in 2022, with geopolitical conflict, rising prices, and the labor market playing key roles. Which stories captured investors’ attention the most? 

This infographic from New York Life Investments outlines the top Google searches related to investing in 2022, and offers a closer look at some of the trends.

Top Google Searches: Year in Review

We picked some of the top economic and investing stories that saw peak search interest in the U.S. each month, according to Google Trends.

Month of Peak InterestSearch Term
JanuaryGreat Resignation
FebruaryRussian Stock Market
MarchOil Price
April Housing Bubble
MayValue Investing
JuneBitcoin
JulyRecession
AugustInflation
SeptemberUS Dollar
OctoberOPEC
NovemberLayoffs
DecemberInterest Rate Forecast

Data based on exact searches in the U.S. from December 26, 2021 to December 18, 2022.

Let’s look at each quarter in more detail, to see how these top Google searches were related to activity in the economy and investors’ portfolios.

Q1 2022

The start of the year was marked by U.S. workers quitting their jobs in record numbers, and the effects of the Russia-Ukraine war. For instance, the price of crude oil skyrocketed after the war caused supply uncertainties. Early March’s peak of $125 per barrel was a 13-year high.

DateClosing Price of WTI Crude Oil
(USD/Barrel)
January 2, 2022$76
March 3, 2022$125
December 29, 2022$80

While crude oil lost nearly all its gains by year-end, the energy sector in general performed well. In fact, the S&P 500 Energy Index gained 57% over the year compared to the S&P 500’s 19% loss.

Q2 2022

The second quarter of 2022 saw abnormal house price growth, renewed interest in value investing, and a bitcoin crash. In particular, value investing performed much better than growth investing over the course of the year.

IndexPrice Return in 2022
S&P 500 Value Index-7.4%
S&P 500 Growth Index-30.1%

Value stocks have typically outperformed during periods of rising rates, and 2022 was no exception.

Q3 2022

The third quarter was defined by worries about a recession and inflation, along with interest in the rising U.S. dollar. In fact, the U.S. dollar gained against nearly every major currency.

Currency USD Appreciation Against Currency
(Dec 31 2020-Sep 30 2022)
Japanese Yen40.1%
Chinese Yuan9.2%
Euro25.1%
Canadian Dollar7.2%
British Pound22.0%
Australian Dollar18.1%

Higher interest rates made the U.S. dollar more attractive to investors, since it meant they would get a higher return on their fixed income investments.

Q4 2022

The end of the year was dominated by OPEC cutting oil production, high layoffs in the tech sector, and curiosity about the future of interest rates. The Federal Reserve’s December 2022 economic projections offer clues about the trajectory of the policy rate.

 202320242025Longer Run
Minimum Projection4.9%3.1%2.4%2.3%
Median Projection5.1%4.1%3.1%2.5%
Maximum Projection5.6%5.6%5.6%3.3%

The Federal Reserve expects interest rates to peak in 2023, with rates to remain elevated above pre-pandemic levels for the foreseeable future.

The Top Google Searches to Come

After a year of volatility across asset classes, economic uncertainty remains. Which themes will become investors’ top Google searches in 2023?

Find out how New York Life Investments can help you make sense of market trends.

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