China Can’t Deleverage, At Least Not Yet
Balding’s World: Is China Deleveraging? Part I
If we combine loans outstanding to households and non-financial enterprises and government categories, we see that outstanding loans grew 12.6% in 2016. Nominal GDP grew at 8% so the great Chinese deleveraging actually saw leverage relative to nominal GDP increase if we account for the fastest growing sector of Chinese lending. In other words, if the Chinese credit market consisted of just nonfinancial corporates and households, outstanding debt is still growing 1.59 times faster than nominal GDP.
There is one final note here. This all relies on official data and makes no assumptions about its validity. The calculations here are nothing more complicated than basic math using official numbers. However, concern about official data is perfectly valid. For instance, at the end of 2015, Liaoning would have had an official bank loan to nominal GDP ratio of 121%. However, at the end of 2016 after the National Bureau of Statistics in Beijing adjusted its GDP downward after years of self admitted fraud, this changes the outlook enormously. At the end of 2016 with the adjusted GDP data has a bank loan to nominal GDP ratio of 169%.
This is just a sliver of the overall story but even by this narrow definition, there is no deleveraging taking place even with the most generous of definitions.
A test for Chinese deleveraging: is the GDP growth collapsing?
I’m using Steve Keen’s simplified debt model to show how we should expect a major slowdown if China deleverages. See: Get ready for an Australian recession by 2017
Assume China’s nominal GDP is 80 trillion yuan, and debt is 160 trillion yuan (200 percent of GDP).
If GDP grows 8 percent, that’s 86.4 trillion yuan.
If credit grows 12.6 percent, that is 20.2 trillion yuan.
Total nominal demand was 106.6 trillion and 19 percent was credit.
In Year 2 China lowers credit growth to match nominal GDP.
China’s GDP was 86.4 trillion. It grows 8 percent to 93.3 trillion.
Credit was 180.2 trillion, it grows 8 percent or 14.4 trillion.
Total nominal demand is 107.7 trillion, growth of 1 percent. Credit drops to 13 percent of total nominal demand.
China can’t quickly deleverage and maintain its GDP growth rate. It wants to slow credit, slowly, and then let GDP growth do the work of growing out of the debt.
In the meantime, the PBoC is spending (printing?) resources trying to fight deflationary pressure from the dollar. China will need years to complete this process, but if the U.S. dollar bull market still has a year or two to go, the greatest risk of crisis is still ahead.