Saturday, July 2, 2016

So much credit for so little output?

A feature of China's recent economic growth has been the central role of debt. Real estate and now stock markets are sustained by ever increasing volumes of debt.

The graphic below captures the scale of capital misallocation without proportionate increase in output.

Total social financing, a broad measure of funds secured by households and non-financial companies, topped $22 trillion in March, more than twice China’s $10.4 trillion GDP, according to official data. There’s no equivalent metric in the U.S., but household debt stood at $14.3 trillion while non-financial debt totaled $13 trillion at the end of the first quarter, according to the Federal Reserve. The combined tally of $27.3 trillion is roughly 1.5 times the U.S. GDP.
The scale and speed of credit expansion has been staggering!

Update 1 (05.07.2016)
Bloomberg captures the scale of credit growth in China in terms of the difference between its present rate and trend rate. It is atleast a quarter more than the trend rate.
China analyst Charlene Chu estimates that as much as 22% of all China's outstanding credit may be non-performing by the end of 2016, compared with the official bad-loan number for banks in March of 1.75%. Recognition of bad loans is clearly an area where India trumps China!

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