Saturday , 10 December 2016


China’s Debt Bomb & What Might Spark the Fuse

The ramp up in Chinese debt accumulation has been a leading concern of warning3investors for years. The average total debt of emerging market economies is 175% of GDP, and skyrocketing corporate non-financial debt has launched China far beyond that number. The real question is: by how far? The answer is disconcerting, because nobody really knows. In today’s chart, we look at various estimates to the size of China’s debt bomb, its payload, and what might spark the fuse.

Total debt is made up of various components, including government, corporate, banking, and household debts. In the case of China, it is corporate debt that is particularly explosive.

  • According to Mckinsey, the country’s corporate sector already has a higher debt-to-GDP than the United States, Canada, South Korea, or Germany, even while still being considered an “emerging market”.
  • S&P Global Ratings now figures that Chinese corporate debt is in the 160% range, up from 98% in 2008. The current number in the United States is a less ominous 70%.

 

If there’s something that can ignite the fuse of China’s debt bomb, it is non-performing loans (NPLs) – a sum of money borrowed upon which the debtor has not made scheduled payments. They are essentially loans that are either close to defaulting, or already in default territory. If there’s a place to start defusing the bomb, this is it.
  • China has an official estimate for this number, and it is a benign 1.7% of debt. Unfortunately, independent researchers peg it much higher.
  • Bullish analysts have the number pegged in the high single-digits, while bearish analysts put the range anywhere between 15% and 21%. Even the IMF says that loans “potentially at risk” would be equal to 15.5% of total commercial lending.
Disclosure: The original article, from VisualCapitalist.com, was edited ([ ]) and abridged (…) by the editorial team at munKNEE.com (Your Key to Making Money!) to provide a fast and easy read.
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