Markets
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.
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.
Markets
3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble
Valuations are much lower than they were during the dot-com bubble, but what else sets the current AI enthusiasm apart?

3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble
Artificial intelligence, like the internet during the dot-com bubble, is getting a lot of attention these days. In the second quarter of 2023, 177 S&P 500 companies mentioned “AI” during their earnings call, nearly triple the five-year average.
Not only that, companies that mentioned “AI” saw their stock price rise 13.3% from December 2022 to September 2023, compared to 1.5% for those that didn’t.
In this graphic from New York Life Investments, we look at current market conditions to find out if AI could be the next dot-com bubble.
Comparing the Dot-Com Bubble to Today
In the late 1990s, frenzied optimism for internet-related stocks led to a rapid rise in valuations and an eventual market crash in the early 2000s. By the time the market hit rock bottom, the tech-heavy Nasdaq 100 Index had dropped 82% from its peak.
The growing enthusiasm for AI has some concerned that it could be the next dot-com bubble. But here are three reasons that the current environment is different.
1. Valuations Are Lower
Stock valuations are much lower than they were at the peak of the dot-com bubble. For example, the forward price-to-earnings ratio of the Nasdaq 100 is significantly lower than it was in 2000.
Date | Forward P/E Ratio |
---|---|
March 2000 | 60.1x |
November 2023 | 26.4x |
Lower valuations are an indication that investors are putting more emphasis on earnings and stocks are less at risk of being overvalued.
2. Investors Are More Hesitant
During the dot-com bubble, flows to equity funds increased by 76% from 1999 to 2000.
Year | Combined ETF and Mutual Fund Flows to Equity Funds |
---|---|
1997 | $231B |
1998 | $163B |
1999 | $200B |
2000 | $352B |
2001 | $63B |
2002 | $14B |
Source: Investment Company Institute
In contrast, equity fund flows have been negative in 2022 and 2023.
Year | Combined ETF and Mutual Fund Flows to Equity Funds |
---|---|
2021 | $295B |
2022 | -$54B |
2023* | -$137B |
Source: Investment Company Institute
*2023 data is from January to September.
Based on fund flows, investors appear hesitant of stocks, rather than overly exuberant.
3. Companies Are More Established
Leading up to the internet bubble, the number of technology IPOs increased substantially.
Year | Number of Technology IPOs | Median Age |
---|---|---|
1997 | 174 | 8 |
1998 | 113 | 7 |
1999 | 370 | 4 |
2000 | 261 | 5 |
2001 | 24 | 9 |
2002 | 20 | 9 |
Many of these companies were relatively new and, at the peak of the bubble in 2000, only 14% of them were profitable.
In recent years, there have been far fewer tech IPOs as companies wait for more positive market conditions. And those that have gone public, the median age is much higher.
Year | Number of Technology IPOs | Median Age |
---|---|---|
2020 | 48 | 12 |
2021 | 126 | 12 |
2022 | 6 | 15 |
Ultimately, many of the companies benefitting from AI are established companies that are already publicly traded. New, unproven companies are much less common in public markets.
Navigating Modern Tech Amid Dot-Com Bubble Worries
Valuations, equity flows, and the shortage of tech IPOs all suggest that AI is different than the dot-com bubble.
However, risk is still present in the market. For instance, only 33% of tech companies that went public in 2022 were profitable. Investors can help manage their risk by keeping a diversified portfolio rather than choosing individual stocks.

Explore more insights from New York Life Investments.

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