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Things That Seem Normal But Definitely Aren’t, Part 1: Soaring Chinese Debt

The era of fiat currencies and central bank printing presses has desensitized us to massive leverage and its implications. So when it is reported, for instance, that China‘s private sector borrowing has risen to levels that are unprecedented in financial history, this is greeted with a collective yawn.

It shouldn’t be, though, because no society can continue to borrow this kind of money without spinning out of control. Some details:

China issues record new loans in the first quarter of 2019 as Beijing battles slowing economy amid trade war

China’s efforts to battle its slowing economy amid the trade war with the United States gathered pace at the start of 2019 with banks issuing a record amount of new loans in the first quarter of the year.

Banks issued 5.81 trillion yuan (US$865 billion) of new loans between January to March, beating last year’s previous high of 4.86 trillion yuan, the People’s Bank of China said on Friday.

In March alone, banks issued 1.69 trillion yuan (US$251 billion) in loans, which was the second highest behind only March 2009 when China was at the peak of rolling out an all-out stimulus programme which engineered a rebound in China’s economic growth but also left the country with a huge debt hangover.

Aggregate financing, the broadest measure of credit supply that include bond issuance, initial public offering and off-balance sheet lending, jumped to 2.86 trillion yuan (US$425 billion) last month, while the January-March amount was 8.18 trillion yuan (US$1.2 trillion), up by 2.34 trillion yuan from a year ago, the central bank data showed.

The following chart shows the year-over-year percentage growth in Chinese private sector borrowing. Assuming (generously, given the trade war and long-in-the-tooth expansion) that Chinese GDP growth will average 6% in coming years, debt growing at twice that rate is just a tad aggressive. Especially for an economy that more than quadrupled its debt in the previous decade.


source: tradingeconomics.com

Some comments on the subject from Credit Bubble Bulletin’s Doug Noland:

Beijing has become the poster child for Stop and Go stimulus measures. China employed massive stimulus measures a decade ago to counteract the effects of the global crisis. Officials have employed various measures over the years to restrain Credit and speculative excess, while attempting to suppress inflating apartment and real estate Bubbles. When China’s currency and markets faltered in late-2015/early-2016, Beijing backed away from tightening measures and was again compelled to aggressively engage the accelerator. Timid tightening measures were unsuccessful – and the Bubble rages on.

China now has the largest banking system in the world and by far the greatest Credit expansion. The Fed’s dovish U-turn – along with a more dovish global central bank community – get Credit for resuscitating global markets. Don’t, however, underestimate the impact of booming Chinese Credit on global financial markets. The emerging markets recovery, in particular, is an upshot of the Chinese Credit surge. Booming Credit is viewed as ensuring another year of at least 6.0% Chinese GDP expansion, growth that reverberates throughout EM and the global economy more generally.

The resurgent global Bubble has me pondering Bubble Analysis. I often refer to the late-cycle “Terminal Phase” of excess, and how much damage that can be wrought by rapid growth of increasingly risky Credit. Dangerous asset Bubbles, resource misallocation, economic imbalances, structural maladjustment, inequitable wealth redistribution, etc. In China and globally, we’re deep into uncharted territory.

Why can’t extremely fast credit growth continue forever? Because at any given time there are only so many borrowers capable of paying back big loans, and most of them have already borrowed what they consider wise for their legitimate needs. In order to move the amount of borrowing beyond this natural equilibrium, lenders have to find new, by definition less creditworthy, borrowers. Let the process continue for a while and an economy ends up with mostly junk credit – that is, loans unlikely to be repaid. Which is a pretty good description of today’s world.

 

Emigrate While You Still Can

8 thoughts on "Things That Seem Normal But Definitely Aren’t, Part 1: Soaring Chinese Debt"

  1. I think the “collective yawn” in response to yet another record breaking level of monetary craziness is one of fatigue rather than unconcern.

    Just as thermodynamics predicts only the final “steady state” of a system but says nothing about the RATE at which that final state will be reached, most economics theories and “common sense” rationality foresees only the final consequences of bizarre policies and actions but not necessarily the rate at which those consequences will manifest. A time factor can only be approximated empirically from historical data. For example, most fiat/”paper” currency systems fizzle out within about 100 years or so.

    But the rate of other monetary and economic “results” relevant today have very little historical precedent to glean much. For example – and in my opinion – the single most important question concerning the unprecedented central bank actions globally over the last 10 years (namely debt monetization, aka QE) concerns price inflation. According to conventional thinking excessive, if not hyper, inflation is the number one concern and theoretical consequence of QE, and yet it hasn’t happened, at least not pervasively and to a troubling degree. So the question becomes “when, then?”, and to be intellectually honest, “will price inflation EVER flare up as a consequence?”

    I submit, it is that very question – and a lack of a definitive answer by conventional economic theories – that has ushered in the re-emergence of MMT (“Modern Monetary Theory”.) Inveterate “socialists” are using that as a foot hold for claiming MMT can work, but not for theoretical reasons per se but only because conventional economics is becoming suspect.

    After all, it’s true that many things predicted by conventional economics and “common sense” have not worked out that way (so far.) For example, the national debt levels in general – and the US debt level in particular – were never supposed to rise “too high” because the governments’ borrowing costs would become prohibitive due to ever-rising Treasury bond rates. That didn’t happen. Instead interest rates over the last 40+ years – at all levels – have steadily fallen as total debt levels (public and private) have risen. One could protest and say that was because of central bank interventions that destroyed the bond market dynamics, but then conventional theory would add that excessive “price inflation” would occur as a result, but that hasn’t happened (yet) either. Another response to that could be that “price inflation” has taken place in the form of currency debasement in general and of the increased price of assets (RE, equities, bonds, etc.) The point I’m trying to make, however, is that conventional economic theories have not been so good at predicting outcomes A PRIORI – at least so far – and so the loons of the world are growing bolder. (BTW, my main objection to MMT is not based on monetary arguments but that it is a wholly – by definition – government program and for that reason alone would be god-awful and would never be executed faithfully according to the theory.)

    One last point. Just that “market tops” are often reached once nearly every one has capitulated and there are no more “bears” left in the room, the emergence of MMT in the public discourse may be the canary in the coal mine for the global monetary system. If MMT gets accepted any more than it has already – especially by the “intelligensia” – it may be time to hunker down.

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