China dials back on debt

Wednesday 22 Aug 2018

China, the world’s second biggest economy, built up huge amounts of debt after the global financial crisis (GFC) and this acted as a locomotive to drive post- GFC growth while supporting investment markets.

Credit growth leapt to an annual pace of over 30 per cent in 2009, providing a huge boost for the economy.

"China’s government has acknowledged the earlier pace of credit growth was unsustainable.”

While the pace of growth has slowed since then, it has still outpaced the growth rate of the economy. As a result, the stock of debt has doubled to a little less than 250 per cent of gross domestic product (GDP).

All good things come to an end
China’s government has acknowledged the earlier pace of credit growth was unsustainable and after undertaking another economic stimulus program in 2015, which pushed credit growth to over 20 per cent, it has now more than halved to 8 per cent.

Such dramatic swings in credit growth will inevitably be important for the economy and markets.

The best way to look at this is how much the growth of credit changes, rather than simply the pace of growth. This is commonly referred to as a “credit impulse” measure.

Jon Anderson of Emerging Advisors Group calculates a series for China which looks at the changing growth of credit relative to the size of the economy.

It shows a dramatic rebound in growth in 2008, followed by a slowdown that troughed in 2014 before another dramatic rebound and sharp slowing in recent years.

The current reading puts the credit impulse at its weakest in a decade but with some signs of stabilisation beginning to emerge. However, credit leads the economy by around a year and flags a weakening in momentum for a while yet. But the impact appears to extend well beyond China’s shores.

Global impact
The China credit impulse series, with a lead of around a year, has correlated reasonably well with the Global Manufacturing Purchasing Managers Index series (PMI) since the GFC period. (See graph above or click here for a larger version.)

In a world where most economies were reducing their debt burden, China’s aggressive leveraging has made it a locomotive for growth.

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Source: ANZ bluenotes

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