A Record 18% Of China's GDP Goes To Debt Service

Think China's new "proactive" fiscal policy shigt will be sufficient to kick start the local economy, and boost global GDP? Think again.

In the latest analysis from Vertical Group's Gordon Johnson, the strategist writes "that China's proactive fiscal policy pledge could fall short as servicing its existing credit stock absorbs an increasing share of GDP."

As a reminder, last week, China’s State Council said it will adopt a proactive fiscal policy, outlining ways to fund ¥1.4tn in bonds to local government for infrastructure & provide ¥1.1tn in tax cuts, among other actions (e.g., R&D tax credits), all while urging no broad-based stimulus.

In Johnson's view, this is a narrative that is rather reminiscent of ‘14, when the gov’t unleashed a wave of “micro-stimulus” measures after a string of weak data points (i.e., 5 mos. of contracting real estate investment). Yet, as he notes, the most recent PBoC mini-stimulus is much smaller than ‘14, while key restrictions remain in place for real estate/shadow loans (historically growth-driving conduits), compounded by the law of diminishing returns, suggesting a smaller boost from a much larger base this time around.

Moreover, China’s total credit stock is markedly higher now than in ’14, implying more of every yuan in stimulus is going to service outstanding debt. How much? That may well be the critical question to gauge the flow through from any new fiscal policy.

Here is Vertical Group's answer:

While China exited ’17 with an est. 266% of total credit to GDP, some economists put that ratio at >300% today. On trailing 12-mo. nominal GDP of ¥86.5tn, as of 2Q, this equates to >¥259.5tn in credit, which, assuming an avg. borrowing cost of 6%, means China’s annual debt service is ~¥14.3tn, or 18.0% of GDP – sensitizing interest & credit-to-GDP, to a respective range of 4-7% & 285-320%, puts China’s debt service at 14-22% of GDP.

Johnson's punchline:

Indeed, China may stimulate more, as it did in ’15-’17, but, as of yet, it is doing far less than in ’14, as an increasing amount of “growth” is required to feed existing debt.

If this analysis is accurate, China will have a far more difficult time not only stimulating its domestic economy this time compared to 2014, but in offshoring the favorable inflationary externalities from its latest expansion. In short: the world's growth dynamo may be getting choked up with debt, which means that in the next global crisis, China will no longer be able to step in and kickstart global growth. And with central banks running out of securities to monetize, just who will arrest the next recession?


JBL Davidduke2000 Tue, 07/31/2018 - 20:54 Permalink

yup, add onto the fact that most of that debt is accrued by state owned enterprises & state owned banks

they've figured out the world aint on a gold standard anymore so whats the harm of printing & pressing keystrokes on a keyboard?

the east is using it as a digital accounting system to incentivize plebs to go out n work, make shlt or put together deals w other nations. at the end of the day if a SOE goes bankrupt? the debts are written off & whatever infrastructure, tech or resources gathered remains intact

In reply to by Davidduke2000

Davidduke2000 Justin Case Tue, 07/31/2018 - 21:07 Permalink

China loans the world money, while the us borrow money. from Africa to Latin America to Australia China is building infrastructure on credit for over 55 countries yet the us consider money that is owed to the world bank is owed to the us, I have no idea how they can figure this out, yet the world bank is far from being the us.

We know that only the federal government owes over $21 trillion USD plus of course all unfunded liabilities, plus the money that is owed by all 50 states plus all the money owed by all municipalities in the country 90,000 local governments just simply imagine the size of their debts, we can easily say the united states governments as a whole owe over 1 million trillion USD. does anybody believe that one day this money will be paid??? no fucking way.

In reply to by Justin Case

Baron von Bud Offthebeach Tue, 07/31/2018 - 22:00 Permalink

Mr. Duke, you are clearly not an optimist. The debt will all be monetized. Now, you'll say that's impossible. What's impossible is how anyone would lend a nation $22t so they can do wars and buy stuff. Regardless, it's fiat currency. They'll design a monetization plan that buys up bonds and will proudly announce it as a great idea: The Global Recovery Act. The Titans of Digital Reality will stand aside the President and nod in admiration. The markets will recover and a new level of absurdity begins. Debt doesn't matter if monetized slowly.

In reply to by Offthebeach

Prosource CrabbyR Tue, 07/31/2018 - 23:51 Permalink

Then we should tell the private organization to take a flying leap when they want to be 'repaid'. Debt? What debt? Not my debt. I was told to just say no.

Default? It's not de-fault of the people yo.. But the resulting destruction of the dollar as global reserve currency? ... there will be blood.

In reply to by CrabbyR

Handful of Dust Tue, 07/31/2018 - 20:55 Permalink

The pain begins. Even the economists in HK said it was a bad idea for China to fight a trade war with USA. Now that the EU will most likely enter on USA side, it's gonna be really interesting.

My guess as politicians see the writing on the wall and panic, we'll see a flood of them mid- and low-level officials sneak out of Mainland to Hongcouver and Australia before the SHTF.

 I lost confidence in them when they quoted the wookie. Bad move imo.

Davidduke2000 Handful of Dust Tue, 07/31/2018 - 21:11 Permalink

There is no such thing as trade war with China, it is the us that is importing what it needs and that happens to be $1 trillion, China import what it needs from the us which happens to be $250 billion, where is the war? the us has nothing to sell the world and has a very inflated dollar that put it out of competition on most goods in the world, second the us has no natural resources it used them long time ago and it is still importing 11 million barrel of oil every single day, yet trump wants to sell oil to the world, quite laughable.

In reply to by Handful of Dust

roddy6667 Handful of Dust Tue, 07/31/2018 - 22:20 Permalink

The average Chinese citizen saves 36% of his income. He can weather a 36% cut in pay by simply suspending savings temporarily. He does not need to change anything in his lifestyle or spending habits. By cutting back on a few things liking dining out, movies, new consumer goods, or travel, he can easily deal with a 50% cut in pay with no sweat. If Chinese citizens boycott cars and anything else that has an American name on it, the repercussions will be huge in blue collar America, the people who voted Trump in.  

Americans are living on the edge. The American savings rate is negative. 62% cannot come up with $500 for a car repair or a medical expense. They get paid on Friday but are broke on Wednesday.

Which one will survive a trade war better?

In reply to by Handful of Dust

CheapBastard roddy6667 Tue, 07/31/2018 - 22:49 Permalink

My guess is you have not been to China and seen how spoiled their middle class peeples are? Their yutes are even more spoiled then the parents and go ballistic if deprived of ANYTHING for > 60 seconds.

The peasants there are tough as nails as are many of the old timers, but the upper and middle class younger folks are some serious spoiled pussies.

In reply to by roddy6667

Tarjan CheapBastard Sat, 08/04/2018 - 10:38 Permalink

@ Cheap,

roddy6667 lives in China as do I. Me thinks you are mislead by a few videos of a couple of spoiled, young Chinese females acting out.

Every weekend I meet with a group of Chinese adults who want to keep their English skills up and we have wide ranging discussions. These are middle class people who can and will tough it out if they have to.


In reply to by CheapBastard

Giant Meteor Tue, 07/31/2018 - 21:09 Permalink

"Think China's new "proactive" fiscal policy shigt will be sufficient to kick start the local economy, and boost global GDP? Think again."

What is this fiscal policy shigt they speak of?

richsob Tue, 07/31/2018 - 21:15 Permalink

China is a cast iron kingdom on a foam foundation.  The U.S. is a time bomb politically and financially.  Russia is frantically trying to cover up for its weaknesses.  Europe and the rest of the world are in a demographic nightmare, with a few rare exceptions.  Bottom line, it's going to be very tough sledding over the next 25 years and if you are smart you will do your best to enjoy life as we know it today as much as you can because someday we will look back and say right now was The Good Old Days.

Prosource richsob Wed, 08/01/2018 - 00:03 Permalink

Disagree that the US is a time bomb politically. There's NY and Cali, and then there's the rest of the US. Sure TPTB try to whip up serious division, but most people just work and live their lives. Financially we are screwed thanks to the central banks, but that will be a global wipeout regardless. Europe has demographic problems, but it's not the worst of their problems. There will be some tough sledding but if you have saved, are debt free, stored some food, water, ammo, etc., and are loaded up with silver and gold, then you will fare better than most. But yeah, we are likely to see a Yuge drop in standard of living for most people. 

In reply to by richsob

My Days Are Ge… Tue, 07/31/2018 - 21:43 Permalink

Agreed. Propaganda article.

Look up  "list of countries by external debt"

USA  - 98% of GDP and $58,000 per capita

China - 14% of GDP and $1,200 per capita

External debt is the only debt that matters.

Internal debt can be wiped out. Bankruptcy. Whatever.

The US owes foreign creditors US$21 trillion.  OK, some of those are entities of US corporations or entities of the US Government (CIA subsidiaries).  But, the bulk of that debt is owed to non-US foreigners.  If the US reschedules or otherwise dishonors debts to foreigners, then the value of the US Dollar is destroyed.

On the other hand, China owes foreigners only US$1.8 trillion.  That is about the size of its US bond portfolio.  China can pay off all foreigners tomorrow by distributing US bonds to creditors in kind.  The USA can not.