"China's Debt Has Grown $4.5 Trillion In Past 12 Months, More Than The US, Japan And Europe Combined"

Tyler Durden's picture

While concerns about China's debt load, capital flows, and depreciating currency have been pushed to the backburner in recent months, perhaps facilitated by a welcome rebound in global inflation - perceived by markets and global central bankers that monetary policy is finally working -  it is worth a quick reminder of how we got here.

First, a quick trip through memory lane to remind us how much has changed in just the past year.

In a note by Morgan Stanley's Chetan Ahya released on Sunday, the strategist reminds us that a little more than a year ago, the global economy was facing intense disinflationary pressures. Global commodity prices were declining significantly and the slowdown in China and other major commodity-producing EMs had led to some concerns that it could pull developed markets into recession and drag inflation down along with it. At the same time, in China, producer prices fell by almost 6%Y and the regime change in its currency management approach meant that China was no longer absorbing disinflationary pressures from abroad.

And while this seems like a distant memory today, thanks to China which has played a pivotal role in driving the global inflation cycle – this time on the upside – as the cyclical recovery has both lifted China’s own inflation and transmitted it globally, here is how this happened: the recovery in China has been driven by yet another round of debt indulgence. Debt in China has grown by US$4.5 trillion over the past 12 months, by far the highest amount of debt creation globally as compared to US$2.2 trillion in the US, US$870 billion in Japan and US$550 billion in the euro area. Indeed, China on its own has added more debt than the US, Japan and the euro area combined.

While we have shown the IIF's forecast of Chinese debt countless times in recent months, here it is once again to put China's unprecedented debt expansion in context:


Furthermore, as we noted last week, for the first time Chinese domestic debt liabilities crossed the 200 trillion yuan threshold, just shy of $20 trillion. This has been driven primarily as a result of an exponential increase in Chinese corporate debt which has grown from $4.5 trillion in 2008 to over $17 trillion as of 2016, even as Chinese GDP growth has been cut in half from 12% to 6% as trillions in non-performing loans - by some estimates as much as 20% of total loans - clog up the debt-growth transmission machinery.


For now at least, the good news is that this debt creation has at least managed to stoke Chinese inflation, if not so much economic growth. The bulk of the debt creation in China has been diverted towards infrastructure and property markets. This push to domestic demand has provided an uplift to global commodity prices and China’s commodity-related producer price segments, as Morgan Stanley calculates. Higher commodity prices, alongside the improvement in demand, have begun to translate, albeit modestly, into the non-commodity segments of the producer price index.

Outside China, the rise in commodity prices is pushing headline inflation higher in DM too. Given China’s dominant role in the global manufacturing supply chain, the dissipating disinflationary pressures in China’s producer prices should transmit more generally into tradeables (core goods) inflation. Recall that while core services inflation had been holding up well in DM, it was the core goods component which had been the key drag on core inflation.

That said, China is already slamming the brakes (or at least trying) on debt creation as much of these trillions in new debt have found their way into China's housing market, where prices are growing at a record pace, leading to concerns for Beijing of another out of control housing bubble (which in turn has sent Chinese car sales soaring as the local asset bubble jumps from one asset to another).

And since record debt is what catalyzed the rebound in global inflation, any possibility of a slowdown in China's debt-creation is being carefully watched. As Morgan Stanley adds, to assess the potential for any overshoot in the cyclical recovery, the key indicator to watch in this context will be China's property sales. Fundamentally, the economy is still facing the issues of over-investment and excess capacity, which policy-makers are resolving in a gradual approach. These factors point towards a bias that disinflationary pressures will reassert themselves once the effects of the stimulus fade.

Ultimately this all goes to a topic we have discuss frequently, most recently last month, namely China's credit impulse, which boosts both the economy and inflation expectations in the 1-2 quarter after a massive debt injections, but subsequently leads to a contraction unless offset with even more debt. Schematically, this is shown in the following Goldman chart:

Whether China's recent debt-fueled growth fades soon is a material issue for the Fed which is set to hike rates in just over a month, a hike which like in December of 2015 may come at a time when the Chinese credit impulse pulls sharply back and lead to the next global deflationary wave just as the US is further tightening financial conditions, leading to a sharp spike in the USD and a substantial decline in the Yuan.

Further, as an indication of how intertwined China's economic fate is with the rest of the world's, a senior Australian politician warned, just weeks after the continent celebrated a quarter century of growth without a recession that "China’s growing debt mountain poses a risk to Australia’s financial stability."

As the FT summarizes, China is Australia’s largest trading partner, accounting for A$150 billion of two-way trade in 2015. Beijing is also an important foreign investor in Australia, leaving Canberra potentially among the developed nations most exposed to a Chinese downturn. China’s growing debt in its local government and state-owned enterprise sector were potential vulnerabilities that could end up having an impact on the continent, Scott Morrison, Australian treasurer, said in an interview with the Financial Times.

“We are not rose-coloured-glasses optimists about China,” Mr Morrison said. “We have a practical and real appreciation about what some of their vulnerabilities are.”


Australia’s warning on Chinese debt follows concerns expressed by the International Monetary Fund and others, including billionaire George Soros, who have warned that adverse shocks in China fuelled by its rising debt levels could spark contagion and hit countries with a high trade exposure to the country.


“I am not forecasting any change in China but we are very practically minded of the vulnerabilities and what that could convert into — but equally saying they have the capacity to manage it,” he said.

It is courtesy of China, and thus its debt creation, that Australia’s economy is growing at an annual rate of 3.3%, among the highest in the developed world, and has notched up a remarkable quarter of a century of growth without a recession. Surging exports to China have played a key role in enabling its economy to continue growing even during the financial crisis in 2008, when many other countries faltered. Growth has remained robust despite a slump in commodities prices over the past five years.

Should China, whose consolidated debt/GDP is now at or above 300%, feel truly compelled to slow down its debt creation, not just Australia but the rest of the world will feel the consequences.

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Midas's picture

Soyrent Gleen.

BaBaBouy's picture

It's Fine as long as their spending a large part of new debt on GOLD...

38BWD22's picture



If China's debt continues to grow like that (probably I would guess), that would indeed be very good for physical gold prices.

Bitcoin is already benefitting from Chinese financial and political instability.

Look for more problems leaking out from China.  China is no miracle, no panacea...


Escrava Isaura's picture

If China's debt continues to grow like that (probably I would guess), that would indeed be very good for physical gold prices.


Well, it doesn’t work like that in China.

Sunny Mewati , Finance Graduate Student, Peking University.

The answer to this question is different across different period in Chinese history.

1978-1994 : China opened up its economy in 1978 and allowed Chinese firms to trade with the outside world. This was difficult with an arbitrary exchange rate. China then adopted the dual exchange rate system in which the Renminbi has two rates, the home rate and the trade rate. The home rate was set by Beijing and the trade rate reflected market value of the Renminbi. Chinese firms were allowed to trade with the outside world using the trade rate till 1984 when it was replaced with the swap rate.

The home rate was to maintain price stability and prevent inflation in China while the trade rate was to help Chinese businesses expand abroad despite the capital controls. As expected there were severe distortions between both these rates. They were never the same. The home rate fluctuated at around 1 Yuan to 2.4 dollars while the swap rate was around 8.5 dollars. This led to the creation of a huge black market for exchange of currencies.

1994 onwards: Both these rates were unified under a single exchange rate regime that we see now where the price of the Renminbi though market determined is heavily controlled by the People's Bank of China to maintain export competitiveness. 


China after the formation of the PRC never had two currencies.* Foreign Exchange Certificate worked like currency but was not a currency. China had two exchange rates from 1978 till 1994. These rates were combined into one in 1994.

Foreign Exchange Certificates: Renminbi is literally 'People's money' and in from the early days of Chinese independence till about 1970's, most foreigners were viewed with skepticism in China. Therefore, they were not allowed to 'hold' Renminbi with them in its original form because the government thought that if they carry this currency back to their countries, there will be counterfeit Renminbi problem in China and it will somehow threaten their national security. **

All foreigners were hence required to exchange all the foreign currency that they have brought with them into FEC's. They would then use these FEC's for normal payments just like anyone else would use RMB's. FEC's worked like a currency but were not a currency as in they were worthless outside China.

The distinction here is between currency and medium of exchange. All currencies are mediums of exchange but not all mediums of exchange are currencies. Gold is a medium of exchange but is not a currency. FEC's were abolished when the two exchange rates were unified.

The case of Hong Kong: It can be argued that since Hong Kong is a part of China, Hong Kong dollar is a Chinese currency too. It is correct in principle but not in practice. Renminbi and HKD have a market determined exchange rate and are issued by different central banks.

The case of Macau is similar.



38BWD22's picture



Escravita (4:05 PM)

You quoted my remark about physical gold prices, again I would assert that a swiftly growing Chinese debt would likely be positive for (physical) gold prices.

While interesting (I did not know most of that), your quoted Quora comments re recent history of the renmimbi and yuan did not address gold prices.


Rich Stoehner's picture

China's debt is America's problem.

Wulfkind's picture

Seems to me after a cursory look at that first graph that China goes a debt binge for four years and then takes a breather.  Sometimes a VERY short breather and other times (like after the 2008 crash) a longer breather.

Looks like after this year, they may be taking a breather.  That could be interesting.

Radical Marijuana's picture

The language of "debt" is deliberately misleading!


"If history shows anything, it is that there’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt — above all, because it immediately makes it seem that it’s the victim who’s doing something wrong."

— David Graerber


Globablized Neolithic Civilization is based on governments enforcing frauds by private banks.

China has become integrated into that "debt" is actually making "money" out of nothing.


The majority of people do not understand that.

They were conditioned to feel like they do not to!

Those systems based on ENFORCED FRAUDS are


THAT is the essence of the alleged "Growth baby!"

Equinox's picture

Yea, but China has real gold.


Mountainview's picture

and the debt is domestically hold therefore a strictly Chinese problem. ( not like Greece, Italy or the US of A)

Duc888's picture



People always gloss ove that fact.  Get back to me when they have NO manufacturing and owe 20Trillion EXTERNAL debt.


Mountainview's picture

As long as Chinese accept all the US, EU and Japanese helicopter money for payment of their manufacturing products no problem. As countries refuse Chinese investments, as in Australia or others, a red flag goes up. The smooth power transmission from West to East turns into suddenly head line stuff.

ZD1's picture

There is a global effect to China's debt which has lifted China’s inflation rate and transmitted it globally.

For example, Australia’s largest trading partner and most important foreign investor is China which leaves Australia potentially among the developed nations most exposed to a Chinese downturn.

"Should China, whose consolidated debt/GDP is now at or above 300%, feel truly compelled to slow down its debt creation, not just Australia but the rest of the world will feel the consequences"

Radical Marijuana's picture

"Money" created out of nothing as "debt" is actually NEGATIVE CAPITAL.

The astronomically magnified amplitude of that electronic 'money' is INSANE.

"Real gold" provides an old-fashioned illusion to many, which does not admit and address the deeper issues that the MAD "Money As Debt" systems have been "paying" to strip-mine the natural resources of the planet at an exponentially accelerating rate, while that was able to be publicly presented in the most absurdly backward ways possible, since that operated through fundamentally fraudulent financial accounting systems.

The alleged "economic growth" of Australia is based on really misunderstanding everything.

Once upon a time "real gold" used to somewhat present actually existing positive capital.

However, even then, the superficial view of the political economy prevailed in ways which deliberately ignored the bigger picture of what was actually happening: "Almost everyone was taught that money was invented to replace the messy business of barter. … But ... anthropologist David Graeber, and other experts on the history of money, say that this is a myth. Instead, they say that money was invented to finance war, and to keep score while armies went about pillaging and looting."

Globalized Neolithic Civilization became globalized pillaging and looting of the planet. Civilization is operating according to the principles and methods of organized crime, because nothing can stop the biggest and best organized gangs of criminals from dominating civilization. Of course, that includes the relationship between China and Australia, as it does almost everyone, almost everywhere. Civilization is able to publicly present everything it is doing in the most absurdly backward ways possible, because of the long history of being able to back up lies with violence, becoming integrated systems of legalized lies, backed by legalized violence, which now includes the ways that China is integrated into the globalized systems of electronic "money" frauds, backed by the threat of force from atomic weapons.

Those who like to believe that "real gold" presents some significant positive capital are no longer thinking in ways which are remotely close to being in actual orders of magnitude of what is happening. Once upon a time, when there were only paper "money" frauds, backed by gunpowder weapons, those established systems back then had not yet been injected with such enormous amounts of exponentially increasing fraudulence as the currently established systems have become, as globalized frauds, backed by atomic weapons.

"Real gold" provides some old-fashioned "ring of truth" to the degree that it exemplifies the principle of the conservation of matter. The conservation of matter has actually been rendered a special case of the conservation of energy. Human beings and civilization should understand themselves as manifestations of general energy systems, which live as entropic pumps of environmental energy flows. However, the history of how that actually developed has driven intensifying paradoxes, which have become sets of consistent contradictions, due to the ways that civilization necessarily operates according to the methods of organized crime, with the corollaries  becoming that public governments enforce frauds by private banks, in ways which are publicly presented in the most absurdly backward ways possible...




Those who still believe in the old-fashioned notions regarding "real gold" are NOT able and willing to approach admitting and understanding the degree to which precious metals have become tiny components in runaway criminal insanities, due to "economics" being able to publicly present itself in the most dishonest ways possible, which have become overwhelmingly dominate world views, due the long history of being able to back up lies with violence.

The interrelationships between China and Australia exemplify everything else which is similarly happening everywhere else: "wealth" is actually being destroyed at an exponential rate, to a degree to which the apparent value of some "real gold" has become too trivial to matter within that overall context. The overall essential problems are that prodigious progress in understanding various energy systems has enabled series of industrial revolutions, which have been channeled through sociopolitical systems based upon being able to back up lies with violence, which has thereby becoming magnified by so many orders of magnitude that the "ring of truth" in "real gold" has become too negligible. Rather, what is theoretically imperative is for human beings and civilization to better understand themselves as manifestations of general energy systems. However, doing so has become too politically impossible, because of that would require series of intellectual scientific revolutions and profound paradigm shifts.

It is barely possible to exaggerate the degree to which "economics" has become based on being able to enforce frauds, which have become exponentially more fraudulent. Since globalized Neolithic Civilization became globalized pillaging and looting of the planet, accumulating hoards of precious metals is relatively ridiculous. (Of course, it is arguable that not doing so is even more ridiculous, however, that is only so in ways which are relatively insignificant.)

In order for human political economy to make sense, it would have to be understood within human ecology. That would require that economics REVERSED the ways that it now is based upon ENFORCING FRAUDS, that deliberately ignore the principle of the conservation of energy, and misunderstand entropy in the most absurdly backward ways which are humanly possible. At the present time, human economics gets away with publicly operating on the basis of being able to enforce frauds, while doing so is publicly presented in the most dishonest ways which were possible to develop through thousands of years of being able to back up lies with violence, which could become more integrated and sophisticated systems of legalized lies, backed by legalized violence.

The Chinese and Australian political economies are merely more particular examples of the overall ways that Globalized Neolithic Civilization became globalized pillaging and looting of the planet, which were able to be publicly presented as if those were actually good and positive things to do, because of the ways that everything is being publicly presented in the most absurdly backward ways possible, such as enabled by enforced frauds, becoming exponentially more fraudulent.

While making "money" out of nothing as debts is used to "pay" for strip-mining the planet, that kind of negative capital continues to be publicly presented as if it were still the kind of positive capital that "real gold" may have once upon a time presented, due to it manifesting the principle of the conservation of matter, as a form of the principle of the conservation of energy. However, anyone who continues to still think about precious metals in those old-fashioned ways are not remotely close to being in the actual order of magnitude of globalized electronic monkey money frauds, backed by the threat of force from apes with atomic bombs.

At the present time, both China and Australia are integrated into Globalized Neolithic Civilization, which is able to publicly present everything it is doing in the most absurdly backward ways possible. Therefore, it continues to be quite politically impossible for those sociopolitical systems to prevent themselves from automatically becoming exponentially more fraudulent. Everything regarding "economic" activities are being publicly presented by the best available professional liars and immaculate hypocrites, in ways which present everything in the most absurdly backward ways possible, since it is politically impossible to reconcile that kind of "economics" with the actual environmental energy systems.

Various old-fashioned notions regarding precious metals continue to be NOT better reformulated according to taking the principle of the conservation of energy more seriously, which includes recognizing the ways that the concept of entropy has been historically inverted, in order that sociopolitical systems based upon enforcing frauds could continue being dominated by professional hypocrites. At the present time, both China and Australia are integrated into Globalized Neolithic Civilization, which is actually destroying "wealth" as fast as possible, to degrees to which any residual value in "real gold" is too little, too late, and too trivial to matter much anymore.

Volkodav's picture

Is not most Chine debt internal?

The Duke of New York A No.1's picture

Ummmmm .... China does happen to have a population of 1.4 billion ... which I believe is more than the population of the US, Europe, & Japan combined.

Absalon's picture

That's what happens when you have a fifty percent national savings rate.  The money has to go somewhere and the easiest place for it to go is to lend it to someone who will never pay it back.

RawPawg's picture

Go Long Weiner

Just staying on topic with 'Merican Top-Trending subject

mofreedom's picture

Go short DC area real-estate.

Brexit II: Trump 2016

Pigs get slaughtered.

Sheep get sheered.

Amen. Happy Sunday!!!

The Duke of New York A No.1's picture

Short the Obamacare bloated pig stocks.

Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) Oct 30, 2016 2:14 PM

China is buying all the THINGS with their fake money. Meanwhile, the Western middle class is having all of their things exchanged for fake money.

I can't believe that so many people are so obtuse that they can't see the big picture here.

hooligan2009's picture

well said!

"do no work, pay no taxes - just print MOARRR money!"

Jason T's picture

Ve Ruv Debt! 

hooligan2009's picture

how many bulls are in the china shop? build more chop houses!

RayKu's picture

Western economic theories do not apply in China in the long run. It is cognitive dissonance at best, to consider China in the same light as the west. It would be closure to compare them to the USSR rather than any system of the west. Even that won't get you  half way to understanding. Several thousand years of cultural influence does not get wiped out in less than seven decades.

There are things they are capable of doing that the west would find near impossible to comprehend.

One of those things is withdrawal from interactions with the world. The only thing stopping them at this moment is food.

Looking back in their history is enlightening to say the least if a westerner can check their culture at the door for purposes of study.

Absalon's picture

"One of those things is withdrawal from interactions with the world."


They need us a lot more than we need them.

Shed Boy's picture

Really? Who do you think will build all our electronics? Like that Samsung TV? Like your iPhone? Like your electric razor? If China cuts us off, were screwed. We need them far more then they need us. They have the rest of the world to sell to and as fast as USA is pissing off the world, we will have slim pickens when it comes to buying globally. For us to revert back to a society that makes things would take 20-30 years...maybe 15 if we start now while a few of us old guys that can still solder are alive.

Absalon's picture

"Really? Who do you think will build all our electronics?"


Oh no.  You might have to wait six months to get a new telephone or a bigger TV.  That would be the end of the world as we know it.


The reality is that Thailand, Vietnam, the Philipines, Indonesia, Bangladesh, India etc would all be happy to start manufacturing for the West.  Two years after China stopped selling to us, we would not notice they were gone.

highly debtful's picture

Debt is like gravity, same consequences for everyone in the long run, several thousand years of culture notwithstanding. I think China is perfecty capable of behaving as wisely or as foolishly as any other given nation or culture. Just check out their Great Leap Forward, or the current endemic corruption or environmental problems in the country.

I don't get this constant mystification of the Chinese mind and culture, since they've proven to be as capable of pursuing dumbass policies these past decades as the next guy . It's an ancient culture for sure, but that doesn't protect them from stupidity. Oh, and they have gold, which isn't a bad thing in and of itself, but what will count is the actual value of all that gold at any given time as compared to the volume of their debts. It doesn't help to hold a decent amount of gold if your debt is simultaneously skyrocketing. Unless of course we'll have a global Weimar event. We'll just have to wait and see about that, won't we?

Gead's picture

Nice to read a sane comment. If I know anything about the Chinese from business interactions with them in my area, it is that they love gambling. I mean REALLY love gambling. As prejudiced as it may sound, the average Chinese man or woman is born an addict to anything that offers odds of winning. And when you consider the population and the history of China - a whole lot makes sense when that is taken into account. When you CAN lose so many people in war, economic collapse, invasion, plague and be able to shrug it off comparatively easily relative to the Western world gambling high stakes is a 'nada' issue. It is simply a way of life.

White Mountains's picture

Notice how the Chinese are propelling BitCoin ever higher?  They are using it as a safe haven.

Imagine when this thing blows! 

It's a good idea to invest in a couple BitCoins.  The potential return is astounding compared to the potential loss. Put a thousand bucks (chump change for alot you readers) or even just a hundred into it and let it sit.

Ironic, the Chinks could fund your retirement.

38BWD22's picture



One ZH-er put it nicely in yesterday's Bitcoin thread:

"Trickle Stacking"

I am doing that...

Sudden Debt's picture

Well... what crossed my mind when I read is was: I BET THE US AND EUROPE ALSO ADDED MORE DEBT THEN THEY SAY!!



They are printing as much as in 2008&9 for sure!

People don't realise how close we're at bank hollidays right now!

38BWD22's picture



We're close to a Bank Holiday.  You bet.

They ARE printing moar.  And lying about it.

Sudden Debt's picture

and no inflation and no rate hike this fall will confirm it.

It's outcome is already 99,9% sure.


38BWD22's picture



There's still a little bit more time to prepare.

atthelake's picture

The Chinese tend to be more reactionary than Americans and Chinese bankers should be careful they don't end up fed to the dogs.

a1sinclair@aol.com's picture

China was responsible for up to 70% of global GDP growth from 2008 thru 2012 when you add the additional exports (2008-2012) to China from many other countries, especially, Australia, Brazil, Germany, Canada, Indonesia, Chile, South Africa, Russia and other oil states and in an aritcle today by Stephen Roach of Morgan Stanley, he indicated that even at this slower level of growth they are responsible for almost half of global growth.  In essence, if China quit growing; the global economy would go into recession.  China's banking system has moved from $8 trillion in 2008 to $32 trillion now and their shadow banking has moved from $1 trillion to $9 trillion in the same time period.  China is completely ouf of control.  The U S banking system has moved from $9 trillion in 2008 (same as China's) and printed $4 trillion with $2 trillion of that back at The Fed in excess reserves and we are up a net $1 or $2 trillion.  China is up $32 trillion dollars from 2008.  Total global debt of all kinds is around $200 to $225 trillion and China is now around $50 trillion of that with an economy of only $10.5 trillion.  Their debt to GDP is approaching 500% of their GDP.

38BWD22's picture



I have been in the camp for years that says that China will not rise to supremacy.  Too many problems that The West does not fully understand.

Even Peru is feeling China's slowdown in buying materials like copper...

coast's picture

seems more and more, every day, that everything is Biblical

Dragon HAwk's picture

Shhhhhhhh... be quiet or people will realize it's not real Money,

sinbad2's picture

I assume most of that debt is in US dollars?

Because there is no return on investment in the US, China must look very attractive.

Now if the Yuan was to crash relative to the US dollar, China would owe a mountain of money.

If however the US dollar collapsed relative to the Yuan, the debt in Yuan would be trivial.


China is going to crash the US dollar and clean up big time.

The US has been doing this to 3rd world countries for a long time, so it does work.

bentaxle's picture

Difficult to feel there is anything to see here. As you say, " While concerns about China's debt load, capital flows, and depreciating currency have been pushed to the backburner in recent months...."

It's as if the next debt crisis arrives and the solution which everyone knows will be applied is...more debt, Ctrl+ P, etc....crisis over.

rockmanlinux's picture

you mean they now have 4.5 trillion in assests according to Wall Street.  Assets soon worth zero of course but if you can duct tape it why not until everyones duct tape no longer works... 

Let it Go's picture

Recently China has been on a tear to add liquidity to its flagging financial system. What it is failing to do is reform. A combination of corruption, to much debt, and policies that misallocates capital will come back to haunt them.

Expect the debate to continue as to whether China has turned the corner, however, one thing is clear and that is money flowing out of the country continues to distort markets across the world. More on this subject in the article below.