The Marginal Productivity Of Chinese Debt Has Gone From Bad To Much Worse – Not Good For The Rabalancing Case by Bryce Coward, CFA, Gavekal Capital Blog
Taking the Chinese GDP statistics at face value (an increasingly big assumption these days) we point out a rather ominous scenario which seems to be developing in the productivity dynamics of Chinese debt-financed growth. Basically the amount of growth that each new unit of credit produces is plunging to levels not seen since 2009-2010 when the Chinese unleashed the largest GDP adjusted stimulus program in the world. As it stands now, each new unit of debt is buying less than .5 units of marginal growth, and that, again, is taking for granted the accuracy of the GDP stats (chart 1). In reality the ratio is probably much lower than the current reading of .47.
Is this sustainable? Of course not. As we have been saying for several years now, Chinese growth is going much lower as the economy rebalances from being an investment led model to a consumption led model. One of the signs we’re looking for to indicate that the transition is taking place is actually a slowing of new loan growth and improvement in the indicator in chart 1. We’ve got exactly the opposite so far, which is an indication of the Chinese pushing on the debt string even more to fuel growth rather than accepting slower growth still, but a rebalanced economy. This, in a perverse way, probably increases the risk of the dreaded hard landing as the chances of a credit “event” rise even further.