As this credit versus GDP chart shows, China has suffered from chronic outstripping of GDP growth by credit growth since the onset of the Great Recession and global financial crisis (mid-to-late 2008):
Herein is the crux of China's great challenge: the longer the gap between leverage and output expansion rates persists, the more it's buying short-term growth at the expense of long-term economic balance, sustainability, and viability.
China's total debt already stands in the high-200s to low-300s percent of GDP, and one can only hope it will before long plateau and even start declining - the last thing anyone needs is for this to rise to a Japan-like 400 percent, but should China's transition fail, by the early 2020s that's exactly where it'll be.
To get an idea of how quickly the country has levered up, according to one China skeptic, Beijing is effectively a poster child for the global debt orgy which since the 2008 crisis has added $60 trillion of new debt to generate only $15 trillion of new GDP. Of these totals, China accounts for a full third, i.e. $21 trillion and $5 trillion respectively: debt has exploded fourfold post-crisis, from US $7 to $28 trillion, yet that's barely doubled GDP from $5 to $10 trillion; this translates quite neatly to 300 percent growth of debt versus only 100 percent for nominal GDP.
In fact, as I personally recall, China's nominal GDP didn't hit $5 trillion until 2010 when it overtook Japan for the no. 2 spot; using a late-2008 base GDP of $4.2 trillion, that translates to a more favorable 138 percent nominal GDP growth to the present versus 300 percent for debt. Better, but still clearly unsustainable.
From this, applying a y-root of 7.5 years (September 2008-March 2016), and with the total GDP growth multiple of 2.38 (238 percent of base, i.e $10 trillion divided by $4.2 trillion), we calculate an average annual GDP growth of 12.2 percent; the same y-root of 7.5 years as against total debt growth multiple of 4.0 (400 percent of base, i.e. $28 trillion divided by $7 trillion) yields average annual debt growth of 20.3 percent.
This squares well with the above chart: since the crisis average credit growth has outstripped average GDP growth nearly by a factor of 2-to-1, and indeed the disparity was especially acute after early 2012, when the global post-crisis recovery fizzled out and slid into a long deceleration that seems destined to only continue. On the eve of Xi Jinping's accession to power in 2012 (given the chart's three-quarter lag), Chinese authorities responded to this new threat by embarking on another mini-credit expansion which, in failing to bring growth back higher over the following year, plunged the country into the deeper deflationary slowdown it's trying to break out of now (nearly half the country's total capital investment in 2013, according to this study, was wasted on uneconomical projects).
It would appear that the sheer waste in 2013 enabled Xi to effectively enshrine his "new normal" of slower growth when he unveiled his economic rebalancing agenda that fall: this was simply an acknowledgement of hard realities which even the all-powerful communist party planners and managers can't escape indefinitely. Thus credit growth, which had already fallen back from its 2012 mini-stimulus peak of 20+ percent, trimmed further to eventually bottom out in the low single digits in Q2 2015 (again, per chart's three-quarter lag). Indeed, all the so-called "stimulus" of interest rate and reserve requirement ratio (RRR) cuts by PBOC since late 2014 have merely been to ease the irrevocable downshift which was now greatly exacerbated by the end of QE in the US and the Fed's subsequent rate normalization program.
Last summer's stock market crash and currency devaluation effectively ended this relentless softening of credit intensity, as Beijing turned up the spigots again to ward off the dreaded hard landing. Interestingly, while Q1 2016's real growth of 6.7 percent was below Q4 2015's 6.8 percent, the chart shows a substantial pickup of nominal growth from Q4's low-6 percent to what appears to be at least 7 percent in Q1. In this nominal sense, then, Q1 was actually a better quarter and could be interpreted as the start of a mini-recovery fueled by the mid-2015 reversal of credit deceleration. Similarly, Q1's own massive credit jump of 15.8 percent - yet again, a reaction to stock and currency turmoil - should work its way through the economy later in H2 this year.
Beijing may appear sanguine about a continued 2-to-1 ratio of credit to GDP growth, but time is running out to bring this down. Should credit growth average 13-14 percent during the 13th five-year plan (2016-2020) while GDP growth averages the targeted 6.5-7 percent, by 2021 the Chinese economy will be only $14 trillion versus a total debt pile between $55 and $60 trillion! In other words, the dreaded Japanese debt-to-GDP ratio of about 400 percent.
Even should that come to pass, it's debatable how much trouble the communist regime will perceive itself to be in: it will be up to its eyeballs in its SOE and government (local and national) debt even more than today, but it will be in very good company. After all, the rich OECD countries will still be even worse off, if current trends continue and they ward off another financial crisis (i.e. with IMF bailout of their central banks). In fact, the US national debt is already far greater than the oft-cited 100+ percent of GDP when counting unfunded liabilities (primarily Social Security and Medicare), at anywhere from $65 trillion to a mind-boggling $210 trillion (351 and 1,135 percent of current GDP, respectively!). That's only public federal debt, by the way: it doesn't even include state or municipal, let alone private corporate or household liabilities, which presently add up to about another 150 percent of GDP! So in other words, we're likely already at least a full 100 percentage points worse off (~500 to 400) in debt-to-GDP than China will be in five years.
This all leads to an inevitable conclusion: at some point likely in the early 2020s, once the world's debt masters have no other options, they'll reintroduce the gold standard with the metal repriced at no less than $10,000 an ounce (roughly eight-fold increase from today). China, needless to say, plans to have a prime seat at the table: it launched its yuan-denominated Shanghai gold fix overnight.
No comments:
Post a Comment