40% Of GDP Per Year: Goldman Calculates The True Growth Rate Of China's Debt

Tyler Durden's picture

For a long time when it came to Chinese loan creation, analysts would only look at the broadest reported aggregate: the so-called Total Social Financing. And, for a long time, it was sufficient - TSF showed that in under a decade, China had created over $20 trillion in new loans, vastly more than all the "developed market" QE, the proceeds of which were used to kickstart growth after the 2009 global depression, to fund the biggest capital misallocation bubble the world has ever seen and create trillions in nonperforming loans.

However, a problem emerged about a year ago, when it was revealed that not even China's TSF statistic was sufficient to fully capture the grand total of total new loan creation in China. We profiled this three months ago in a post titled "China's Debt Is Far Greater Than Anyone Thought", where, according to Goldman, "a substantial amount of money was created last year, evidencing a very large supply of credit, to the tune of RMB 25tn (36% of 2015 GDP)." This massive number was 9% higher than the TSF data, which implied that "only" a quarter of China's 2015 GDP was the result of new loans. As Goldman further noted, the "divergence from TSF has been particularly notable since Q2 last year after a major dovish shift in policy stance."

In short, in addition to everything else, China has also been fabricating its loan creation data, and the broadest official monetary aggregate was undercutting the true new loan creation by approximately a third. The reason for this is simple: China does not want the world - or its own population - to realize just how reliant it is on creating loans out of thin air (and "collateralized" by increasingly more worthless assets), as it would lead to an even faster capital outflow by the local population sensing just how unstable the local banking system is.

Unfortunately for the Beijing politburo, there are ways to find the real number.  This is how Goldman did it: the firm's approach is not to directly quantify the amount of credit extended, because financial institutions (FIs) do not provide good clarity on the true nature of their assets and hence it is difficult to conclude how much of those are indeed credit to corporates and households. Rather, the firm looks at the mirror image of credit—i.e., “money”, which is a metric related to FIs’ funding side. The basic idea is that credit generation is essentially a money creation process, hence an effective gauge of “money” can give a good sense of the pace of credit. But as the officially reported broad money, M2, has been rendered less relevant by continued financial diversification, so Goldman construct our own money flow measure to fit our purpose.

  • Quantify the money flow from households and corporates to various financial investments, including i) bank deposits from households and corporates and ii) non-deposit financial investment by households and corporates, including wealth management products (WMPs), investment funds, insurance schemes and collective trust products.
  • Adjust the money flow measure above for factors that affect the quantity of money but are unrelated to credit generation; These include changes in net government financial balance, FX/RMB conversion by households and corporates, and cross-border RMB flow.
  • Add entrusted loans (which are company-to-company lending and do not create money) to the adjusted money flow measure to make it comparable to the TSF concept.



The table below shows Goldman's estimates for 2016 Q1-Q2, in addition to its estimates for 2011- 2015 discussed previously. In seasonally adjusted terms, our estimate of credit flow for the first half of 2016 is 35% of GDP.

Here is the good news: compared to late 2015, the record credit creation has slowed down fractionally, and the gap with the TSF total has shrunk. The smaller gap seems to be in line with recent reports that listed banks’ “investment receivables” expanded less rapidly in 2016 H1, and it might partly reflect the regulators’ tougher stance against shadow lending in recent months.

And now, the bad news: this "tougher stance" has not been nearly tough enough, because as the following chart shows on a 1-year moving average, nearly 40% of China's "economic growth" is the result of new credit creation, or in other words, new loans.


What this really means, is that China's debt/GDP, estimated most recently by the IIF at 300%...

... is now growing between 30% and 40% per year, when one accounts for the unaccounted for "shadow" credit conduits.

Here is how Goldman concludes this stunning observation:

The PBOC appears to have shifted to a less dovish, though still supportive, policy bias in the last few months. However, given the prospective headwinds from slower housing construction and tighter on-budget fiscal stance in the coming months, there remains a clear need to sustain a high level of infrastructure investment, which is credit intensive, to achieve the minimum 6.5% full-year growth target (see our recent comment here). This poses constraints on how much further the PBOC can keep reining in credit, in our view.

Translating Goldman, some time around 2019, China's total Debt/GDP will be over 400%, an absolutely ridiculous number, and one which assured a banking, if not global, financial crisis. The only saving grace is that for the time being, the PBOC and Beijing have managed to sweep away China's unfixable problems under the rug, with a series of amazing distractions and the effectively nationalization of the stock, bond and FX markets. Alas, this is also the basis for "recovery" in all other developed nations, which means that as of this moment, it is a race between the world's central banks not who can devalue the fastest, but who can avoid losoing credibility first, and watch as these Keynesian mountains of debt, never before seen in the history of manking,  come crashing down as JM Keynes "long run" finally catches up with everyone.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
SimpleJackBlack's picture
SimpleJackBlack (not verified) Sep 8, 2016 8:12 PM

"money" yeah right. Debt. So maxing out my credit cards to 400% of my income is a sound financial decision.

Sounds legit.

Lonesome Crow's picture

You are on to something but I'm sure no one teaches it better than me.

Look me up...


Edit 14 mins later:

O Know, must have struck Chump's nerve. Else why inject the candy ahead of schedule.

Come on, Chump! QUID PRO QUO...

Wile-E-Coyote's picture

Who needs a war more than the US now.

Infocat's picture

All of these central bankers are insane. This will simply lead to an epic shitstorm once the bubble pops. http://www.truthjustice.net/

Lonesome Crow's picture

Is growth of debt a proper measur of GDP?


From where comes the debt?

jm's picture

The world will soon be shocked that 300% doesn't come close.

Nobodys Home's picture

, but who can avoid losoing credibility first, and watch as these Keynesian mountains of debt, never before seen in the history of manking,


Even though many of my posts are quite idiotic,

I'm available for proof reading services......

monad's picture

Those kooky Chinese just aren't good at math. Same old same old.

Yen Cross's picture

  Anyone that thinks Chinese GDP is anywhere close to stated numbers, is in for a [rude awakening]

   Look at the sheer amount of debt [stated] that China is carrying.  It's over $30T .

 If you look at total GDP in the U.S. vs China it's absolutely astounding !!! 

 Both countries have unsustainable debt to service ratios. China is beyond full retard in debt, based on their core economy, and resources.

  The U.S. is equally fucked up, but has the advantage of it's military, banking system, resources, and quasi political system.

  That is all---


Nobodys Home's picture

Russia's not doing too bad. Perhaps we should team up with them!

Yen Cross's picture

  I guess you,ve missed my Micex comments over the last couple of years?

  Yes, Russia was a good investment. Back when  PE: Ratios were much lower.

 Russia was a tough investment, because the world is floating in excess capacity.

 Those low commodity prices made it attractive. The Micex, is also hard to find investment opportunities in.  You have to hedge the trade, or do some offshore banking.

  Russians are notorious " Ponzi Schemers". 

  The Cypriats are even worse. Those assholes will ask for a wire deposit, via SWIFT, and give you NOTHING when you try to withdraw profits.

  They make you feel like you made a bunch of money, because you'll never see it. They just use your money for themselves.

  This was years ago, but I learned the " hard way" a few times. Some of those assholes still send me Holiday and Birthday cards.

  The graft and regulation, I'm currently seeing from the CFTC, NFA, Finra, and other regulators is even worse.

Nobodys Home's picture

I don't miss anything...I also don't remember anything....I'm like a non political but conservative male Killery.

Turks and Greeks...Hmm ... should I pick up the soap or say Bahhh ahh ahhh?

Not for a while....but used to get cards from the Kennedys.....lol

edit: I hate typing lol...but that really is kind of funny.

Bay of Pigs's picture

When I went to Guangzhou and Shenzhen a few weeks ago I was flabbergasted by the size and scope of the size of those cities. They made NYC look small. Yes, the massive debt is a joke, like everywhere else, but the growth there isn't a mirage.

Yen Cross's picture

  Take a crow bar with you next time. Those buildings are pieces of half empty shit.

taggaroonie's picture

A 40% increase in debt for a 7% growth rate is bubbly stuff, which I think is the author's point.

Once the Chinese, savvy gold hoarders that they are, get their heads around the ponzi scams, they'll be in a good position to right the ship.

TeraByte's picture

China´s growth like Japan´s heavily rely on borrowed domestic savings, but domestic lenders won´t see a dime, because money invested equals to the same amount of sovereign debt. It is a zero sum equation with no real growth prospects.

TeraByte's picture

When economy is much of metaphysics and religion. Why not to take Jesus to PBoC board. He can turn water into wine.

East Indian's picture

and "digital credit" into "money"

TeraByte's picture

Jesus, the all mighty can turn your paper possession (99.9% of the London Gold Ex) into solid gold. Just keep on believing and this miracle happens to you my friend.

TrajanOptimus's picture

Is the debt real if the money isn't?

JailBanksters's picture

But Debt isn't growth, Debt isn't wealth, Debt ins't Money, your in Debt because you don't have any Money.

The US Debt has doubled in 8 years of Bongo

The Economy hasn't doubled in size, otherwise it would have grown at 12% per year !!

The GDP has doubled through market manipulation to offset the Debt.

Marx II's picture

Do the maths correctly.

Doubling over 8 yeras implies a yearly rate of 9%.

Look up "compound interest"

JailBanksters's picture

Thar would be compound growth


Either way, Grown is no where near GDP

83_vf_1100_c's picture

  China is fucked because they can't sell to the West as we are broke. They can't sell to themselves because, well I suppose they can til the people figure out the money is made up. Regardless, I need to start finding some US suppliers for my biz needs. Most of my supplies are either Jap made or China made. I may be retiring early after all.

SoDamnMad's picture

OK, Mr. Wong. Sign here for your new loan.  Now you said you want to pay 15 mil RMB each from this new loan on your third, fourth and fifth loans from us.  That means you will have paid off 50% of them. I must tell you the VP is worried about no payments on loan #2 since last year.  You have to try to pay some type of payment on it.  Loans 6,7 and 8 are not 180 days past due on required payments but loan 6 will require something in October.

Have a nice day, Mr. Wong.

lucky and good's picture

 The ongoing efforts of China to stabilize their sagging economy by flooding the markets with liquidity have resulted in a ripple effect and added to the nervousness of markets. When coupled with the overcapacity that developed as the country raced ahead on a wave of easy and cheap money it now finds itself in a situation similar to that which America faced in 1929.

A question we must ask is just how large this newest wave of liquidity really is and where it will lead. China’s debt mania, by this I mean madness, craziness, and frenzy is now the largest ever experienced in the postwar emerging world. The just published article below delves into China's surging debt problem.