China’s remarkable growth in GDP has provided a large boost to global growth over the years. As the global economy and trade recovered from the GFC in 2009 and 2010, China was major contributor in reversing the global down turn and lifting GDP higher.
China Growth Fueled By Record Debt Levels
Its no secret anymore that the real reason, China has been able to rebound so strongly in the last 7 years, was because China has accumulated a record amount of debt to fuel its own GDP growth and keep demand for global trade strong.
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Now that total debt to GDP is approaching 300% (see chart below) in China, its starting to become a drag on the largest economy in the world. As the economy continues to slow due to its debt bubble impacting growth, it increases the risk that China will actually threaten global growth as it deals with its own debt crisis.
If you take a look at the chart below from 2004 to 2008 period, you will notice that the debt to GDP ratio was stable and moving sideways at around 175% debt to GDP. This indicated that the economy was growing in sync with the level of debt growth within China’s economy, which is a healthy sign of a growing stable economy despite at the time debt to GDP was high.
However when you look at the chart from 2008 to 2016, the debt to GDP starts to increase for the first few years and then accelerates as it approaches 2012 over the next 4 years to 2016. This trend is not a healthy sign for China’s economy, as this indicates that the GDP growth has been unable to keep up with the level of debt taken on within the economy.
If debt is growing faster than GDP the debt stops becoming a contributor to growth and instead starts to drag on growth especially as debt to GDP ratio accelerates.
China To Drag Global Economy Down
Now that the debt has become a major problem in China, there have been a number of people and international groups including the BIS, Bank of England (BOE) and NAB Bank among others, who have raised concerns over the growing risks that China’s debt bubble poses on the global economy.
The video below is from a former chief economist of the IMF Ken Rogoff discussing the key issues he believes China’s slowdown poses on the global economy.
Debts Start To Pile UpThe chart below is from 2014 and shows the EBIT debt coverage of 780 bond issuers in China, and the level of interest payments to operating profits.
You can see that back in 2014 a number of debt issuers had a level of 100% or higher EBIT debt coverage. Meaning that the interest payments were higher than operating profits to pay for the loan. Leaving the only options of defaulting on the debts or borrowing more money to pay the interest. Borrowing money to pay existing interest and debt is the definition of a ponzi scheme.
The chart is very interesting even though its from 2014, as it layed the foundation for the problems companies in China are facing in 2016.
According to Reuters.com 25% of Chinese companies profits in the first half were not higher enough to service their debts and make their interest payments.
China’s Debt Crisis Too Big For Government Stimulus To Be Effective.
Professor Steve Keen highlights in this video below, his agreement with BIS assessment of China’s debt crisis, the subsequent slowdown in growth and how China grapples with its high debt levels.
Steve also suggest that the China’s Government will attempt to stimulate the country to allow it to grow out of its debt problems, however he believes the problem is too big even for the Government to handle without experiencing a downturn in the economy.
Global Growth Slowdown To ContinueChina’s debt crisis and its subsequent slowdown within its own economy, is coming at an inconvenient time for the global economy. Many countries including the US economy are starting to experience a slow down as recent economic indicators highlight the slowdown in global growth.
Within the US it’s becoming more apparent that the US economy is about to experience a recession or may already be in a recession unofficially.
Originally published by Guy Manno at Crush The Market