China's Debt Bomb: No One Really Knows The Payload

Tyler Durden's picture

No one knows if it's a hand grenade or a nuclear warhead...

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, as VisualCapitalist's Jeff Desjardins warns, 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...

 

Courtesy of: Visual Capitalist

 

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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Cognitive Dissonance's picture

At some point it really doesn't matter how much more explosive you pack into the casing. I suspect they are well past that point.

<Then again, who are we to point fingers? Regardless of where you start, eventually all the dominoes fall down.>

Oldwood's picture

We just have to decide if we want to be at the center of the blast or at some distant perimeter here we can enjoy a more lingering existence.

NidStyles's picture

China's debt is meaningless, they will simply print more to cover it and if the people get out of control, they roll out tanks and gun them down. They've been doing this for years already. This is why the 'bankers/party members' and Tribe are so pro-Communist, because it allows them to enact their pogroms.

ultraticum's picture

Are you talking about the US or Europe?

monk27's picture

They don't need to play the inflation game because, unlike US, they can default on their debt...

BringOnTheAsteroid's picture

The great globalisation experiment will be shown to be one of the greatest examples of human folly in history. Think of a modern airliner. They are safe and reliable because they have multiple and isolated redundant systems. The entire plane cannot be brought down by a single component or system failing. Think of a modern tanker which cannot easily sink due to the breach of one part of the hull due to the multiple isolated compartments.

Human society has survived and trhived due to many tens of thousands if not hundreds of thousands seperate and independent tribes, groups, communities. Once if a country went broke it affacted noone except residents of that country. How far down the rabbit hole have we gone when the crazy shenanigans of a communist country high on the hog of a western debt binge can fuck up nearly every man, women and child on earth. If China fails so will every other major nation on earth because we are all interlinked now.

All I can suggest is to start visualising the horrible consequences of our folly because it will be difficult to correlate and comprehend when the consequence of this folly rears its ugly head and we are mentally unprepared. We will be stunned into inaction as we see the lives we have become so used to living, to expecting suddenly seem extremely vulnerable. That horrible realisation a human must get when their plane is crashing, that sickening and gut wrenching finality that nothing can be done, that mortality is suddenly thrust into your face and there is nothing you can do, no amount of thinking can undo it, no amount of analysis can stop it . . . . . . . . . many of us may wake up one day in the not too distant future with a very slow motion version of that.  

Mountainview's picture

Yes, China sovereign debt is only hold by Chinese...so it's not a direct international finance problem. Probabely there will be a domestic debt moratorium to state owned enterprises in the future which will trickle down to the consumer. So don't worry too much about China debt in the West, worry about our own domestic debt.

Antifaschistische's picture

non performing loans....LOOOLL.

you mean, loans that were scalped by corporate VIPs, where they then buy a "house" in the US, Australia or Canada.   Seems to be performing well for the Real Estate Lobby in the US.

CHoward's picture

Much like our own, when it blows, does the megatonnage really matter?

NidStyles's picture

When it blows the communists will try to move in, and if they fail, they will likely try to nuke us into submission. This is all playing out very similar to the Bolshevik takeover of Russia.

Wild Bill Steamcock's picture

Fuck China. Those subhuman scum can fall off the face of the Earth for all I care. Hope the cocksuckers suffer when this goes off.

BringOnTheAsteroid's picture

Hate to break it to you but the US is now probably the most evil nation on earth, the media is just so well controlled and on message and paint the US as a bastion of freedom, civil rights and democracy. So does North Korea paint itself that way. The current generation of US citizens are not much differemt to the German citizens who sat idly by while Hitler went about invading his neighbours. The US is doing the same thing but in the ME and have just sold it to all the dumb Americans that it's a notable and worthy cause. Just like Hitler did to the Germans. The Germans bought it. The Americans bought it.

Question: How fucking bad does the US government have to get before it's own citizens say enough is enough. How many other countries does it have to invade before Americans start turning on their military and navy.

Answer: There is no limit to bad. As long as Americans get slowly used to the increasingly bad behaviour of the military and navy and the spin doctors in the media stay on message the US could start lobbing nuclear bombs all over the place and it will seem normal, just, right.

The human race is so fucked up it's almost hard to believe.

brooklinite8's picture

Why can't china print Yuan and pay all its debts. I don't get it.

VWAndy's picture

Well GS is the biggest lier so I will guess north of 350%.

Ban KKiller's picture

Surely, there must be one honest accountant in China? Perma press will protect us all. Or heavy toilet paper suits. 

tribune's picture

the us is shameless in their abuse of the us dollar as the worlds currency. china is being shameless in their abuse of debt. they know the system is going to break. at the end though , they will own a lot of real stuff, including gold

Rehab Willie's picture

I wonder if the chinese people know all that money is propping up foreign property markets.

And if they ever get angry and go looking for a place to invade 1st, Hong Couver is great place to start.

factgasm's picture

Would love to have seen a Monty Python movie about the insanity of the global financial system.

The story: A wide-eyed innocent, let's call him Brian, moves from his humble Main Street bank clerk beginnings to Wall Street where he becomes appalled by what he sees and joins a gang intending to bring down the system.

Starring Lloyd Blankfein as Pilate, Donald Trump as Biggus Dickus and Hillary Clinton as Incontinentia Buttocks.

 

CHoward's picture

You know...it just dawned on me that I've never been blown up.  I'm going to put that on my bucket list.

Kirk2NCC1701's picture

China should just DOUBLE DOWN.

It's what Neocons do, when cornered.

CTG_Sweden's picture

 

It won´t solve the problem really but I still think that it would be better for China to convert some of the debt to equity.

chairman mao's picture

Xi said fuck it (debt to equity) we gonna let zombie firms fall, but banks are still lending to those firms. 

Many articles appeared in China this week about how people at the top are mad at this continued lending, something to the effect of "these people think they can just cash out and migrate to Western countries, we are going to throw them in jail"

Fuku Ben's picture

China's total actual debt is probably just like their total actual gold holdings. Nothing reported currently is accurate and everyone will be shocked if they're ever released.

bugs_'s picture

is it bigger than DB?

Omega_Man's picture

China doesn't care... they have lots of gold and factories and people who want to work and make shit for the world, and a population who will heel when required.When the shit hits the fan they will ready to start anew...fresh new plans, new agendas, etc etc...

Merica on the other hand...chaos, anarchy, laziness, no factories, no machine tools, terrible production - mexicans have to do the real work, can't feed or clothe themselves, no gold, no faith in gov, lawlessness, no way to control the population, imported food and basic items... total cockfukery... a very poor position to be in. Plus any politicians or bankers who try to reassemble the system shall be lynched, so not much hope of a quick turn around. Meltdown will go on for 50 years.

PoliceThePolice's picture

Less debt than the USSA. With much more to show for it.

 

 

China has nearly 600% of GDP in corporate, government, and private savings. The savings far outweigh the debt. Remember, not all governments are irresponsible with debt: China, Russia and Norway are on the side of the angels. China only participates in the international debt market to gain a seat at the top table, whence they are implementing Bretton Woods II. China has no need of foreign debt. Theirs is minimal.

Spungo's picture

China's government will probably bail out the lenders to prevent a domino effect. Expect lots of money printing, lots of deflation here for imported goods, lots of inflation over there.

Mountainview's picture

Yes, they will renationalise or mend the balance sheets with their printing press if already nationalised.

Mountainview's picture

Their state owned enterprises are piñatas.

oncemore's picture

USA has to take care of USA.
And not discuss China. Laughable to discuss China.