"In The Last Seven Years, China Accounted For 40% Of All Global Debt Creation"

Back in November 2013, when few had an idea just how massive China's debt bubble truly was, we explained "How In Five Short Years, China Humiliated The World's Central Banks" and said the following:

In order to offset the lack of loan creation by commercial banks, the "Big 4" central banks - Fed, ECB, BOJ and BOE - have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world "Big 4" central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse.


How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined!


And that is how - in a global centrally-planned regime which is where everyone now is, DM or EM - your flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it's really done.

To give a sense of perspective of the numbers involved, we showed the following chart:


To be sure, since November 2013, all those numbers have grown substantially, especially at the ECB and BOJ but nowhere more so than in China, where a little over a year later, a famous study by McKinsey showed that not only has the world not delevered, but that the global "debt creation dynamo" was none other than China...


... whose debt/GDP has since grown to an even more astronomical 350% (and rising exponentially).

China's - and the entire world's - debt load was very much the highlight of the latest BIS quarterly report (profiled yesterday) in which we learned that the "BIS calls time on world credit binge" and that "China’s Leaders Put the Economy on Bubble Watch" even as these same leaders just raised their budget deficit forecast to its highest ever and previewed an even faster increase in its monetary aggregates or M2, which is now supposed to pick up to 13% per year, or roughly double China's GDP growth rate. 

So yes, China debt is growing well over 100% faster than its GDP, a condition which is precisely the opposite of Ray Dalio's "beautiful deleveraging", and the outcome is clear to all.

And yes, while two years ago few had a sense of the true proportion of China's debt load, now virtually everyone does, which is why its credit creation will be put under a microscope.

But what does that mean in practical terms?

Simple: recall that it was China's (and the entire EM sector) furious debt issuance spree in 2008 and onward that together with central bank QE, prevented the world from collapsing into an all out depression. But since China's exponential credit growth delayed the inevitable, it also means that any slowdown in China's credit growth (or outright debt destruction if and when the massive debt defaults and NPLs are finally recognized) will put the world right back into the deferred depression.

And here, courtesy of Macquarie's Viktor Shvets, is the best encapsulation of the predicament the world finds itself in. From volume 52 of "What Caught My Eye"

Rising leverage levels (whilst positive initially) eventually turn to “poison”, as incremental benefit diminishes and in order to maintain growth rates, economies require an ever increasing infusion of credit and ever declining cost of capital.


Although not perfect there is a well-defined relationship between the overall level of debt and velocity of money. Each economy is different (both in term of structure and efficiency) and therefore the degree of tolerance to rising debt levels and associated volatility also differs; nevertheless, as a generalization, the higher debt levels and the faster pace of debt accumulation tends to coincide with lower (and declining) velocity of money.


Then, after showing the declining velocity of money in all developed markets as leverage exploded higher, Shvets focuses on China:

The massive rise in China’s financial leverage is in a class of its own. As China embarked on a highly capital intensive growth strategy, its debt levels accelerated, driving velocity of money down. As can be seen below, China’s estimated debt burden has increased from US$1.5 trillion in 2000 to US$5.8 trillion in 2007 and exploded to over US$28 trillion by 2014 (and should have reached US$30-31 trillion in 2015).

The punchline: China's velocity of money is now the lowest in the entire world, a world in which China provided 40% of the entire credit impulse since 2008!

In the last seven years, China has accounted for around ~40% of entire global incremental debt creation. Such a rapid accumulation of debt in less than a decade, when combined with the capital-intensive nature of the economy and a less sophisticated financial sector, drove China’s velocity of money to one of the lowest levels globally (~0.5x, i.e. below that of Japan).



And while we agree with the BIS and all those others who suddenly had an epiphany and confirmed what we have been saying for years about China's debt load, the question remains: just who will propel the global debt-creation growth dynamo if China is taken out of the picture, and if 25% of the world is covered in debt-demand destroying NIRP?

We hope to get some answers just as soon as the massive short squeeze acorss global markets, the biggest in history, is over.