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.

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flacon's picture

How is it that the country that makes almost everything that I own in my home is deeply in debt? I'm surprised my waffles and eggs aren't Made In China! 


Who the fuck to we (they/we whatever) owe it all to? 


I heard someone say that we owe it to ourselves... and that might be right, but how can a nation that manufactures most of the world's tangible wealth be in such debt? 

LetThemEatRand's picture

It must be all of the draconian labor laws, strict environmental laws, high tax rates, uncertainty relative to the future reglatory environment, wefare, food stamps, medicare, medicaid, and whatever else we are told is the reason that the West is floundering.  Or maybe -- just maybe -- it is far more simple and in fact consistent with what is really ailing the West.  The oligarchs are extracting wealth from the bottom even as they enjoy the greatest manufacturing boom ever known to man, and giving it to themselves.   

markmotive's picture

According to Marc Faber the Chinese slowdown is larger than anyone reports


JPM Hater001's picture

Nope.  I said it almost 3 weeks ago on my youtube.

Dude, China's contraction is massive right now and the ripple will unleash soon.  Said it here first folks!.

Michaelwiseguy's picture

There are 64 million empty vacant parcels of new real estate in China that can house the entire population of the USA. That's all you need to understand.

Tijuana Donkey Show's picture

And? The Fed owns almost that many mortgages, and I would wager that the Chinese or American parcels are clung to by lower class serfs. Is it dog food or dogs for food? Time to wok the dog I think.

malikai's picture

Not a good idea really. The meat's too tough. Best is to stew it, slowly. Then it will be nice and tender.

Zero Debt's picture

The funny thing is, this debt is supposed to show up as an asset somewhere else, especially if marked-to-unicorn. Which in theory should make unicorns quite valuable. But I digress.

max2205's picture

Go boom!

Calling PPT, man your trading desks.

Uber Vandal's picture

In regards to how can a nation that manufactures most of the world's tangible wealth have such debt, consider this:


Suppose you buy a $1 metal pry bar from the a store, made in China.


The metal that is in that tool was mined in the Mesabi Iron Range, transported via Canadian National to Duluth or Two Harbors to a ship.

The ship travels to China.

The ship unloads the iron ore to another train in China.

The train delivers the iron ore to a steel foundry.

The iron ore is processed into steel.

The steel is moved via truck to a factory.

The factory receives the steel from the truck, and produces a pry bar.

The pry bar is packed in a box and put into a container, then onto a truck and drives to the dock.

The container is loaded onto a ship.

The ship reaches the port of Los Angeles.

The container is unloaded and moved via Union Pacific to an intermodal freight yard.

The container is then put onto a truck for a Store Distribution Center.

The container is unloaded into its smaller boxes, that are distributed by truck to various stores.

You drive to the store and buy the pry bar for $1.

You take the pry bar home and proceed to break it removing a stubborn nail.

Prybar ends up in a landfill.

So, tell me, how can you sell an item for $1 with all of those transportation costs, and my, isn't that just wonderfully green and efficient??

Even if the iron came from China, there is still how many thousands of miles of logistics there, all for one dollar.

The name of the game is to undercut everyone, and when no one else is left standing, you can do as you want.

Winston Churchill's picture

Disagree Doc.

Pretty meaningless post without a breakdown in the structure of that debt

plus % interest..

Can't tell if it good or bad.Matched to productive life of assets.Acid test etc..

flacon's picture

I see your point, but what if you could fill 1000 shipping containers with a thousand pry bars in each container. The cost of shipping goes to near zero. 


Some guy on youtube from France had a baseball hat that cost him 1Euro. It was made in somewhere like Malaysia. How on earth did that cotton get picked, processed, boxed, shippped, refined, dyed, knitted, stitched, packaged, boxed, shipped, re-shipped, unboxed and put on the shelf for only 1Euro? 


That is a good question... but part of the answer is the miracle of GENUINE TRUE CAPITALISM, but the other part is something else because economic impossibilities (like negative interest rates) can't last for long. 

Uber Vandal's picture

I see your point as well, Economies of Scale, and just simply enjoy the hypocracy of being "green" when you start to think of what is all involved in getting whatever it is to your door.

It took me quite a while to realize that the people who "took our jobs" are not the bad guy, or enemy. It was our corporate overlords who decided to do this, for we weren't "profitable enough".....


Againstthelie's picture


And who is making the laws that allows them to do this?

And who is electing the lawmakers and supporting this system, if it delivers cheap chicken filet?

And what is the mathematical function of money as debt with compound interest?

ForTheWorld's picture

Externalities, anyone?

Even though this list is a good start, there are still two major parts missing - the people required to perform those jobs, and the fuel required to move all the vessels transporting the goods. Then, there's all the parts that fill all the gaps.

If we really sat down to think about it, we could come up with pages and pages of steps, sub steps and separate lists of steps that go into making that pry bar. Such a massive, interconnected system is most assuredly fragile.

spdrdr's picture

Seriously, all you would have to do is shoot their QA people, and double the  price of the pry bar to $2.  Problem solved!

Ratscam's picture

you forgot the interest paid on the debt of the many companies involved in the process.
Estimates of the interest percentage on products ranges from 20-80%, the more refined a product, the more steps, the more interest owed to CBs.

11b40's picture

I work with one of the largest handmade glass factories in the world, based in Zibo.  The Canton Fair, ended last week....the second in a row where attendance and spending were down.  When I was there in the spring, this factory was negotiating with the government for more land to expand.  Even though sales had slipped slightly, there was still optimism.

This morning, I wrapped up the second round of quotes for a major U.S. import company.  There is no way to meet their target price points and make a profit, but the factory said they would take the order to help keep production going.  The negotiations are simply to keep the losses as low as possible....without losing the business.  At the current rate of decline, the factory owner says they will have to cut production and start letting workers go in the early spring.  Europe was a big part of their business, and with all the world's developed economies going backward, they can't shift enough business to other markets fast enough.  It is a worldwide slowdown following an extended period of unbridled expansion.

Countless Chinese factories have gone out of business, and many more are stradling the brink.  I work directly with several of them, and indirectly with others.  There is a lot of fear and a bigger shake-out is coming.  Their economy is no where near being able to absorb the excess capacity, and unless the developed world turns around soon, China is going to get very sick. 

When the orders dry up, so do the pay checks, and they have little of the social safety nets enjoyed in the West.  Yes, they do have a vastly higher savings rate, but that has been declining as their consumer class has grown.  I think the real ticking time bomb in China is the way that the social culture has changed so rapidly.  With the huge migration of rural peasants tied to the land, now converted to city dwellers packed tightly together, the social support structures of extended family and community have seen a dramatic breakdown.  No one knows how this will play out when the problems come to a head.

kalasend's picture

No, the name of the game is keep-the-fucking-people-employed-at-all-costs. 

Some think that China is mercantilistic. Mercantilism cannot explain that kind of debt build-up, which, mark my words, will get uglier and uglier beyond imagination. The CPC(Commy Party of China) does not work to make China strong. It works to keep the regime afloat. Period. 

When thinking of China, think CPC + the sheeple. Their interests don't necessarily align. Then everything about China would just manifest itself.

e-recep's picture

> Who the fuck to we (they/we whatever) owe it all to? 


Easy. To central banks all over the world.

LongSoupLine's picture

Now overlay their gold holdings...problem solved.


Sun Tzu yet again.

reader2010's picture

Most Chinese SOEs have borrowed heavily to {mal} invest in the residential housing projects because they firmly believe Chinese dicks are longer and fatter thus needing more bedroom time. 

xray vision's picture

Is there not some way to broker the debt and exchange it so that it cancels with someone else?

A guy walks into a hotel and lays $100 on the counter and says he wants to look at the room.  He goes upstairs.  The clerk slips the C note to the maid for sleeping with him.  She runs and gives it to the butcher she owes next door.  He gives it to the hotel clerk for a gambling debt.  The guy walks back down to the front counter and says the room is not acceptable and takes his $100 back.  Three debts were relieved.   How could this be made to work in the real world?

DYS's picture

This is how it works when there is plenty of cash in supply.   When the speed of money is restricted, the game locks up.  

GlobalCtzn's picture

And THAT is how the CB's (or more accurately the people that control them) rule the world.

LetThemEatRand's picture

Real world:  a guy walks into a bank and deposits $100.  The bank rehypothecates those funds -- that do not belong to it, but rather belong to the depositor -- and issues 100 loans to various people in the amount of $100 each, using Fed funds at zero percent interest to the bank.  The bank counts the loans as an asset to the bank in the amount of $20,000 (principal plus interest owed).   Its CEO then bonuses himself $25,000.  He tells shareholders about how great he's doing, and issues himself stock options totalling $100,000.   Half the loans default, and the bank collects only $10,000 back.  The Bank CEO bonuses himself another $8000 for collecting $10,000.  The Fed uses taxpayer funds to prop up the price of the bank's stock to protect investors and bondholders.   This costs $1M  because the stock has inflated artificially.  The taxpayer eventually gets a bill for $1,123,000 to avoid a banking crisis.  This is added to the national debt.  The banker and the stockholders/bondholders complain about socialism and buy yachts, and send $10,000 to their Presidential candidate (former banker) with "no strings attached."  The taxpayer is told that the per capita debt in the U.S. is outrageous and unsustainable, and they must accept cuts in social programs they have contributed to their entire lives.

LongSoupLine's picture

So, you're saying the real world is South Park?


"aaannd, it's gone!"

Dr. Engali's picture

That's called money velocity of which we have none. The transmission mechanism is broken and can not be repaired.

mess nonster's picture

The only thing sustainable is the unsustainability.

Robslob's picture

Hong Kong Phooey

Debt is money in any language apparently.

flacon's picture

The French word for money is ARGENT which is also the same word for SILVER. 

falak pema's picture

the french word for love is amour and for pride as well; amour propre...

so pride and love are two faces of the same coin. That summarises oligarchy's two faced conundrum. 

If semantics were in the image of life, love is what we give to others, and self love would be the lowest denominator of social conduct; not the highest. 

Charité bien ordonné truly the song of kings and oligarchs! 

Stuck on Zero's picture

Why worry about corporate debt.  Ben will buy it all.

Why worry about personal debt.  Ben will buy it all.

Why worry about state government debt.  Ben will buy it all.

Why worry about municpial bond debt.  Ben will buy it all.


Sounds like the refrains from some awful oldie.



AldoHux_IV's picture

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.

In our current financial system it is safe to say that high finance or economic group think is like debt, and like debt, is fungible.  Going to any policymaker/politician that needs the illusion of creating opportunity in order for the wealth transfer to continue.  Extracting every possible ounce of hope for the future at the expense of the obedient tax payer and debt slave until there is no one left in this world to be the bigger sucker.

"The whole China needs to be a consumer based economy and all will be right" notion is that as history tells us, you can't fake demand and "growth" (and thereby justifing inflation at all cost) is synthetic thanks to the leverage that has replaced real end demand.  It's another phase in the wealth transfer model we call modern economic policy so that ultimately the citizen slave is left holding the bag.  Aided by a propaganda machine like our current mainstream media, "ism's" will be used to keep the slave distracted in "intelligent" debates and keep the politians smiling until China is finally "developed"-- which incidently could also mean leveraged out, farmed, and sold.

LawsofPhysics's picture

No additially energy input, no additional real growth, period.  Don't think past that or the fact that China keeps accumulating energy reserves and gold.  

ItsDanger's picture

Interesting that the first chart has mostly asian countries (incl. Australia) except for US & UK.  Connection?

vix is for kids's picture

The charts of this article show that the U.S. is, relatively, not the debt-laden basket case of the western world.  Look at Ireland.  People still live and work there. A decent apartment in Dublin rents for 2500 EUR/mo, if you can find one. Clearly, debt ratios are not the most meaningful metric for the health and potential of an economy.

ZIRPThis's picture

When the monetary stupidity you live under couldn't even sell a fiction fucking novel, it might be time to secede.  We're WELL overdue.

falak pema's picture

with levels of debt like this the world is one big shark pool where it will soon be every man (corporate oligarch/government shill) for himself.

We cannot have capitalism and debt cohabiting at this level and pretend that THE RETURN ON CAPITAL  is what society and progress are all about!

The true cost of capital is now horrendous...and no amount of Zirp type sleight of hand can hide that under the carpet as that is circular reasoning.

Do we understand the simplicity of THAT statement? 

LawsofPhysics's picture

Some of us do.  The underlying eCONomic issue is still moral hazard.  The fact that a relative few have the ability to completely game and undermine the fiat currencies of the world without facing any real consequences for bad behavior.  Nothing changes until this is addressed, be it by a rational decision by society or a bloody feast of sharks.  same as it ever was and history is pretty clear on how this will turn out.

PolishHammer's picture

I can't see any slowdown from the isles of my local WalMart

MFLTucson's picture

Bad is good again in America because someone else is more stupid!

orangegeek's picture

Corporate debt in China?  There is no such thing.  It's all government debt in China.  Go Communists!!!

Metalredneck's picture

THe US is only slightly different, in that they use banks as middlemen to get government bailouts.