The Chinese Credit Bubble - Full Frontal

Tyler Durden's picture

Whereas it is relatively easy to track the progression of the "developed world" deep into the twilight rabbit zone hole (in bizarro metaphore-land speak) of no total debt/GDP return as defined by Reinhart and Rogoff (where anything above 80% sovereign leverage is more or less the game over line for one country, let along the entire Western world) courtesy of day to day updates of total debt in the US (103% debt/GDP) and its comparably indebted peers, when it comes to world's growth dynamo - China - it is next to impossible to get a sense of just how big the debt hole is for a country whose economic data has been and continues to be one massive goalseeked, G.I.G.O. blackbox. At least that is the case at the sovereign level where the government can and does show whatever data it feels like as the country is excluded from traditional counterparty flow checks which serve as an at least modest buffer for data fabrication for the other globalized countries engaging in international trade. That, and the Ministry of Truth of course, which some have likened recently to an amateur version of the US' own BLS.

However, while government and consumer debt can be whatever China wants it to be (and when it isn't, any discharged and non-performing debt is merely masked over with more debt: China doesn't have $3 trillion in foreign reserves for nothing) corporate debt, in keeping with Western-style reporting requirements, is far more difficult to obfuscate and falsify in recent years. It is here that we get the first glimpse of the true sheer extent of the Chinese credit bubble, which as the chart below shows, is already the largest in the entire world.

None other than Goldman Sachs is concerned by this absolute number, which in recent years has exploded to all time highs:

The rapid rise of corporate leverage to 130% of GDP in 2011 - one of the highest corporate leverage ratios in the world - is concerning. This high leverage is the result of substantial investment in the manufacturing sector since 2008, leading to over-capacity in many sectors such as solar energy, steel and ship building. It is therefore critical for the new leadership to pursue reforms that not only support the private sector, but also consumption more broadly, in order to utilize this capacity; the alternative would likely prove negative for sectors, banks, and ultimately, the economy.

And here we go back to the one simplest fact of functional leverage that so few grasp: namely that debt, like money, is fungible. And debt, like money, will go to whatever sector has the capacity to carry it: be it corporate, household, financial, or, as a last resort, sovereign, in order to extract every possible ounce of future growth at the expense of current assets and cash flows, until neither viable collateral (as Europe has discovered), nor cash flows (as is becoming ever more apparent in the US) can sustain it.

Sadly, it is still virtually impossible to get a comprehensive picture of total Chinese leverage as a function of GDP, the way we can, and have shown for the rest of the world. Recall from "Five Years Since The Great Financial Crisis: "No Growth, No Deleveraging" these two very telling charts:

Total debt to GDP broken down by insolvent developed country:

 

And total average and median rebased economy debt:

 

What this shows is that all platitudes of the Richard Koos aside and Paul Krugmans, who demand ever more debt, the developed world is at its debt capacity.

So what can we infer about the full big picture in China? We present Chart 2: the historical rise in Chinese corporate (somewhat auditable) and other other (completely imaginary) debt:

If one takes the chart above showing the absolute level in Corporate debt, and assumes this is a valid proxy for total leverage growth across all other sectors, one can say, with a straight face, that if all Chinese debt on and off the books, including shadow leverage, were to be pooled, it would make America's grand consolidated debt (excluding the $100 trillion in entitlements) of 345% appears quite modest.