The Chinese Chart That Keeps The IMF Up At Night

Tyler Durden's picture

As the IIF reported yesterday, in the first 9 months of 2016 global debt rose by $11 trillion, hitting an all time high of $217 trillion, ro 325% of world GDP. Of this increase, the IIF said that China accounted for the "lion's share" and while China's relentless debt-funded stimulus continues to be ignored by markets, one other organization that begins with I and ends with F has also noticed that China has a big problem.

As the IMF recently wrote in its IMFDirect blog, China urgently needs to tackle its corporate-debt problem before it
becomes a major drag on growth in the world’s No. 2 economy. Corporate
debt has reached very high levels and continues to grow.

The International Monetary Fund then lays out at the dimensions of the problem:

From 2009 to 2015, credit grew very rapidly by 20 percent on average per year, much more than growth in nominal gross domestic product. What’s more, the ratio of non-financial private credit to GDP rose from around 150 percent to more than 200 percent, or about 20-25 percentage points higher than the historical trend. Such a “credit gap” is comparable to those in countries that experienced painful deleveraging, such as Spain, Thailand, and Japan.

It then combines the four nations debt/GDP in one chart, and shows the one chart that keeps it up at night.

The chart above make it obvious that unless something changes, and fast, the biggest growth dynamo behind global growth over the past decade - remember, as Kyle Bass so conveniently reminded us, China's banking system has over $30 trillion in financial assets, debt asied - is about to short circuit.

Why the unprecedented debt growth? Simple: this corporate credit boom reflected the government efforts to stimulate the economy in the wake of the global financial crisis, largely through lending for infrastructure and real estate. The outcome: overbuilding and a severe overhang of unsold properties, especially in lower-tier cities, along with excess capacity in related industries such as steel, cement and coal. The combination of heavy borrowing and falling profits led to excessive debt loads. The problem has been worst among state-owned enterprises that benefit from preferential access to financing and implicit government guarantees, which lower the cost of borrowing.

The IMF then proposes several solutions: First, the government should make a high-level decision to stop financing weak companies, strengthen corporate governance, mitigate social costs and accept likely slower growth in the near term. It needs buy-in at every level—state-owned enterprises, local governments, and financial supervisors. Here are the other steps China’s government can take:

  • Triage: Identify companies in financial difficulty and distinguish between those that should be restructured and those “zombie” companies that have no hope of survival and that should be allowed to exit. Because of the existing links between state-owned banks and corporations, a new agency could be created to perform this role.
  • Recognize losses: Require banks to recognize and manage impaired assets. So-called shadow banks—trust, securities and asset-management companies—should also be forced to recognize losses.
  • Share the burden: Allocate losses among banks, corporates, investors and, if necessary, the government.
  • Harden budget constraints—especially on state owned enterprises—by improving corporate governance and removing implicit guarantees to prevent further misallocation of credit and losses.

It then adds that, for now, "risks appear manageable" but only if the problem is addressed promptly.  And this is where the IMF suffers from a tremendous cognitive disconnect, when it says that "indeed, it is encouraging that the government has recognized the problem and is taking action to address it."

Alas, that is not true, because while the government has indeed recognized the problem, it sternly refuses to address it, and instead just last year injected a record amount of debt in the system, even as total debt/GDP in China has now risen to 300%, according to the IIF.

The same lack of willingness to address any of China's lingering structural problems can be noted in most other aspects of its financial system: from overhauling insolvent enterprises and failing to recognize the true extent of NPLs (the recent overtures in debt-for-equity are, sadly, far too modest to make any impact), to implementing broad bankruptcy reform (over fears of millions of workers losing their jobs in zombie enterprises), to the biggest elephant in the room: China's currency woes, which instead of being "internationalized" is being increasingly pressured by the PBOC to trade at a given level due to concerns of soaring capital outflows limited by China's reserve base.

It remains to be seen just when the chart that keeps the IMF up at night will lead to nightmares for others; for now, however, everyone is blissfully ignoring what may be the biggest problem in the world.

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LawsofPhysics's picture

More debt, no shit, the important question is, priced in what?

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) LawsofPhysics Jan 5, 2017 1:36 PM

It will be funny when those "sneaky tax dodgers" in China who sold $1100 BTC have to buy back in at $5,000, $10,000, $20,000 BTC to escape the collapse.


Mountainview's picture

Their debt is in Yuan, therefore a priori a domestic problem. They can do as the others do, they print their way out of the hole.

rccalhoun's picture

whats going to be funny is when some entity mines a trillion BTC and does a one off china devaluation

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) rccalhoun Jan 5, 2017 1:52 PM

And how do you think that is going to happen?

rccalhoun's picture

the ben bernanke of BTC?   who knows who it will be

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) rccalhoun Jan 5, 2017 2:00 PM

That's kind of what the whole "decentralized" thingy is about ya know...


Bitcoin is going to be worth less electricity than what keeps Dragbin synapsing. 

Kayman's picture

"Their debt is in Yuan"

So are their depreciating assets. And an on-life-support currency.

Mountainview's picture

But it's their own printing press they exterior force can blackmail...On the asset side, they own still some T-Bonds--

Consuelo's picture



Yep -

And they also seem to have had (and actually still do) a rather voracious appetite for Real Money.   In fact, an appetite (and urgency) which lends itself to the conclusion that 8+ years of mining and importing Real Money is not simply out of or for, the purpose of 'tradition'.

kliguy38's picture

Nonsense......Zombie, baby eating, aliens don't sleep

SoDamnMad's picture

 The Chinese curve is NPL. They are Yuuuuuge

MPJones's picture

It will put serious brakes on China's growth when the newly liberated Western countries with the USA and UK in the lead and France hopefully soon following, start to repatriate manufacturing to their own people and territories. That can't happen soon enough!

LawsofPhysics's picture

The fun starts when those same manufacturing companies try to sell those product to all those insolvent people...

Consuelo's picture



 As one who experienced this and commented on it (rec.politics for those of that era) profusely at the time, keep in mind that it took ~30-odd years of near break-neck speed of shuttering plants here and ramping them up in China, Thailand, Maylasia, etc., ad-nauseam, to get where we currently reside.   


Best to maintain perspective when it comes to politics, business and the pace of .gov vs. the ambitions of (1) man and all the hope & hoopla that tag along for the ride.

PontifexMaximus's picture

But I do not think, that it keeps china up at night

Dragon HAwk's picture

God what we need is some form of Money that doesn't fluctuate in It's purchasing value.

Hoppingpot's picture

The IMF was set up to help countries with their Balance of Payments problems, that was their remit. Given their abysmal forecasing record in recent times & the fact that their leader is financially illiterate why should this organisation even be commenting on the issue of China's corporate debt ?

malek's picture

-Recognize losses

We're so lucky we followed that to the letter in the USA, right?!

Fundies's picture

I use this chart instead of Viagra.....although it leaves me with a bigger headache.

Spungo's picture

Before I put my glasses on, I thought it was a chart of HIV infection rates.