This Could Be A Problem: China's Debt-To-GDP Rises To A Gargantuan 346%

Tyler Durden's picture

In early 2015, after years of China's massive debt pile being roundly ignored by most so-called experts (despite being profiled here many years prior), McKinsey released a report showing that not only has the world not delevered since the financial crisis, adding well over $60 trillion in debt (through 2016), but also revealing in a format so simple even an economist could grasp it, just how massive China's all-in leverage has become.

Many were shocked when they read that China's total debt/GDP had risen by 125% in under 7 years, hitting 282% as of Q2 2014.

Those same people may be just as shocked to learn that according to the head of financial markets research Asia Pacific at Rabobank, Michael Every, not only has China not begun to delever at all, but since McKinsey's update, its debt has risen by another 70% of GDP!

According to Every, China's 2015 debt-to-GDP might be as high as 346%, and while that is in line with wealthier developed economies but is “vastly higher” than any EM peer.

Cited by Bloomberg, Every adds that the time-frame for debt accumulation pre-crisis varies, but what always follows is a major currency drop afterwards, as has happened even with reserve currencies such as dollar, yen, euro and pound.

He also adds that nominal GDP needs to rise faster than debt for a sustained period if deleveraging is to truly be under way, aka Dalio's beautiful deleveraging thesis. The problem, however, is that with even Goldman admitting that China's real GDP growth rate is about 4.5%, China's debt load is rising orders of magnitude faster than its underlying economy and is on the daily verge of entering the final phase of the Minsky Moment breakdown.

While no surprise to people with common sense, Every concludes that debt must be repaid with interest, which acts as a drag on economic activity, and is the reason why such monstrous debt loads always lead to an economic collapse; making matters worse is that in China cheap credit is channeled to state-owned firms with low or no profitability.

So what happens next? Every believes that China has no choice but to proceed with a massive devaluation, far bigger than the prevailing consensus, and expects the Yuan to plunge to 7.60 against the dollar over the next year.

Some more thoughts from the Rabobank analyst:

"Despite vociferous PBoC rebuttals that such currency forecasts are “ridiculous” and “impossible” there are a wide variety of arguments to explain that view, including: Slower growth, interest rate differentials with the US as monetary policy diverges, declining export competitiveness and net capital outflows and declining FX reserves."

And of course, massive debt, record NPLs and a wave of commodity-related bankruptcies. Every said that the single strongest reason to be bearish on CNY is the debt build-up. When debt-to-GDP rises as rapidly as it has, and to as high (and rising!) a level as it has in China, a weaker currency invariably follows.

In short, a CNY decline of 6% to date is nowhere near an adequate response to the fundamental problems China has.

As such, 2016 is likely to see CNY remain under downward pressure.

"So will the economy, which is desperately in need of real reforms. Of course, China has shown that it can take radical action when needed. However, the most recent example was to drain the CNH market of liquidity rather than allowing it to continue to depreciate and so reflect the lack of radical action elsewhere. CNH is now compliant, but the internationalization of the currency has been significantly set back. Let’s hope that same energy can be channeled into a broader reform process ahead.”

We are far less optimistic: yes, there will be reforms, but only after the government has no other choice, which means that they will take place only after the crash.

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lordbyroniv's picture

yes,..but they have the gold.

slaughterer's picture

Debt/GDP no problem in China: PBOC will just devalue.  /sarc

WTFRLY's picture

Plz stop reporting the dystopia ZH. Too many WTFs per hour here.

Boris Alatovkrap's picture

Quick, is time to build more ghost city. Build and they will come!

new game's picture

i say, lay down baby and i'll come...

stacking12321's picture

this just means that china is positioning the yuan as the next world reserve currency.

IMFers scoffed at the idea of the yuan becoming the world reserve currency before, saying that china's bond market was not liquid enough (meaning: china did not have enough debt!)

they are fixing that problem.

Save_America1st's picture

time for the Chi-Comms to dump several hundred Billion more U.S. Treasury bonds, ay?

0b1knob's picture

And US debt to GNp is ??????????????

Sorry_about_Dresden's picture

https://en.wikipedia.org/wiki/National_debt_of_the_United_States

On January 26, 2016, debt held by the public was $13.62 trillion or about 75% of the previous 12 months of GDP

GNP is $16.99 trillion PPP dollars (2013)

ThroxxOfVron's picture

Even if re-valued at $10K an ounce it would mean nothing againt the debt levels already outstanding...

 

You talk like someone who gets excited by finding a quarter on the stoop along with their $35K CCard bill.

lordbyroniv's picture

so just revalue it to 100k an oz

are u obtuse or something?

new game's picture

at 3 x the alarm bells should go off. the central planners are all over it, move to the next aisle and keep calm. just like the fed they have the black hole balance sheet. next aisle plez...

Boris Alatovkrap's picture

In former Soviet Russia, excitement for day is find ruble note while stand in line for toilet paper.

new game's picture

xcitement is found right here in the comment section-thanks to all. that is after i do my duties and chores, if ya know what i mean-ha...

QQQBall's picture

Boris - excitement was finding TP while in bank line to excahnge rubble (ruble)

 

fixed it/

Consuelo's picture

 

 

It's not even an issue of re-valuing at this point.   It's an issue of: Do you even have any as a backstop for your currency in the First Place...   And we won't really know until the 'I'll show you mine, now you show me yours' moment arrives.  

Stated differently, a 'snap audit' of Fort Knox and the underground vaults in NYC, vs. the PRC.

ThroxxOfVron's picture

As if the Chinese would allow a 'snap audit' of their Gold !

An honest 'audit' by and for Criminals?   Are you people insane??

It is also quite easy to imagine moving tonnage around to be re-smelted/re-numbered and moved from location to location to be counted multiple times in order to account for ANY amounts China ( &/Or The FED for that matter ) sez 'it is in possession of and is now backing it's currency with'.

Gold dreamers will never get honest with themselves about the fact that the metallic monetization era was primitive, volitile, laden with myriad frauds; -and is never returning..

Sorry_about_Dresden's picture

The Treasury, of any country, could back their currency with silver, ambiguously tied to their gold reserves. 

It is what JFK WAS DOING when they blew his skull cap off. 

Look at the SILVER CERTIFICATES issued by the Treasury Department, directed by Executive Order 11110, during those few months before G.H.W. Bush was ordered by Dulles and his Jooh, Rothschild, masters to kill JFK and that is exactly what he did.

The USA has had 3 central banks in it's history  First Bank of the United States (1791–1811) Second Bank of the United States (1816–1836) and the  Federal Reserve Bank.

For those that say we cannot function without the Federal Reserve System are straight up liars.

Hitlery_4_Dictator's picture

I'm not worried they said China doesn't matter now. It used to matter up to a few months ago but now I'm told it doesn't so it's all good.

Kirk2NCC1701's picture

For a Free 1-Year Subscription to Zerohedge, name "The first casualty in any war".

The Saint's picture

We have the gold, too.  Don't we?  Anybody seen it lately?

 

On another note, Obama is reflating the sub-prime bubble.  (Are liberals so stupid they can't even remember recent history?)  This is going to end really badly.

geo_synch's picture

According to the US Mint website, the government keeps 147.3 million ounces of gold at Fort Knox.  At $1200 per ounce, that would be about $170 billion dollars.  During the 1940s, the amount was 649 million ounces.  Nixon sold quite a bit of gold to pay for the Vietnam war.  When he was close to emptying the vault, he took the US off the international gold standard.

Accounting firm Urbach Kahn & Werlin audits Fort Knox yearly, but isn't allowed direct access; instead, it must rely on data provided by the Inspector General's office.  That office isn't allowed direct access, but instead it must rely on data provided by the U.S. Mint.

jcdenton's picture

So, they say ..

So we think ..

Technically, the US of A (the People, not the govt.) sans the vaults at Fort Know, West Point, and Manhattan, has no less than 2000 metric tonnes of gold bullion. That in the custody of one person. Technically, it is all his. But he is prepared to give it all to The People (i.e. the U.S. Treasury). On top of that, he has (again, The People) 32.8 TRILLION to purchase more gold, if we need to purchase more gold ..

Now, considering that he obtained all this via the former USSR (the 2000 tonnes was formerly Soviet, purchased at ~$.40 on the dollar; the 32.8 T dervied from shorting the SUR (Ruble) with $150 BILLION seed funds); that his former working partner, now deceased (via murder) a Chinese govt. agent (similar to his Totten designation, freelance contract to the PRC); son of a Chinese warlord, his father former adviser to the recently deceased Lee Kuan Yew.

Not to mention brokering the present Russian Federation. Initially awarding $50 BILLION for that startup. With another $30 B coming later (if not already paid). Is presently working with Greece on their finances. Has already negotiated with U.S. Congress a debt reduction plan/process. Ah, do you really need more?

Why have you not heard this from anyone else? Well, READ my Readme ..

https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp (Read Me First)

So, with all that said, do think the present dilemma is beyond this said individual's capability?

wet_nurse's picture

Paper debt just as worthless as paper money. Jubilee is coming. Who has gold?

juggalo1's picture

Leverage is a pretty meaningles concept when you include both borrowers and lenders.

Dr Freckles's picture

This is quite sustainable ...

(just need bigger containers)

BandGap's picture

ORIGIN

late 16th cent.: from Gargantua, the name of a voracious giant in Rabelais' book of the same name (1534), + -an.
ThroxxOfVron's picture

But Pantagruel wore the big-boy pants...

FreedomGuy's picture

Actually, they are being great Asian Keynesians. They are just practicing what the West has taught them. You have to admit, it has been a fun ride on the way up.

Jacksons Ghost's picture

Oh, ye of little faith!

Fuku Ben's picture

I'm still wondering how the IMF let China into their whole scam with all the issues they have visible or covered up. Since they have until October to finalize things if China implodes would they just drop them? Or would the IMF bail them out by offering them their own fraudulent fiat for greater control over China? Either way this doesn't seem to have a potentially good ending. If I were the IMF head I'd be prepping my resignation letter and keeping it handy.

Duc888's picture

 

 

Is this internal debt or external debt?

 

Kirk2NCC1701's picture

You beat me to it, but I was going to ask: "Do they owe it to themselves (paid in CNY), or do they owe it to the US or Europe (paid in USD or EUR)?"

Amalgamated Tang's picture

Are they hoping their gold horde revalues AS the crash occurs? Thus the higher price of physical gold offsets the loss fiat value. The crash will affect the entire world economy, not just China, but in the end, will China win thanks to the crash-adjusted gold value?

thisguyoverhere's picture

Thats not a problem to Nate Rothschild and associated banks, its "check-mate".

So we're looking at the books and we might be able to "suggest" a path towards a solution.

pashley1411's picture

Debt adjustment in China; pfftt....    Before this meltdown, every nail in the country can be seized by the government.   After this meltdown, every bicycle in this country can be seized by the government.   Its why China has $1 trillion capital flight.

sschu's picture

Ultimately they will have the same issue as the US, that is the marginal utility of debt turns negative.  The US increased its debt since the crash in 2008, but we have very little to show for it, GDP has not grown faster than this debt.  This cannot be sustained and demonstrates the mal-investment we see.  More debt does not generate more growth, it actually stunts growth when you reach this point.  

China's slowing GDP (who knows what the numbers are), but an increase in debt without a corresponding increase in GDP means they may have reached this same inflection point.  This inflection point has been called debt saturation.

But the Fed etal knows this, so why do the continue down this road?  Bad news for the Chinese.

 

sschu

FrankieGoesToHollywood's picture

Debt only matters if you can't make the payments.  if you can't make the payments, you need to deal with collectors.  There are several ways to deal with collectors and with their activities in the south china sea, would seem China is preparing for those uncomfortable conversations.

Canadian Renegade's picture

So higher debt to GDP is associated with wealthier countries. That sounds oxymoronic to me......

Canadian Renegade's picture

Accidental double post.

CTG_Sweden's picture

 

 

Some non-financial corporate debt should probably be converted to equity.

 

Jason T's picture

..too many people in china. : /

perkunas's picture

China has been the poster child, of the NWO. This is why your jobs, and factories, have moved there, it was all planned. Unfortunately for the NWO they will soon come to realize exactly what a communist government is all about. Without true freedom innovation dies, like it it did in the USSR. They can no longer rely on stealing intellectual property around the world, as all the factories and jobs will be in china.The more the NWO pushes this failed model on the world, it will become even more evident, that its a failure.

yogibear's picture

Ask yourself why china was hoarding gold and Germany was silently getting back it's gold.

The people in the countries know what the end-game looks like and their hedging accordingly.