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’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.
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.