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Friday, 3 February 2017

China’s Kiss of Debt

China’s Kiss of Debt: The single most important predictor of economic and financial trouble is when a country takes on too much debt over a short span of time, says Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, in a video for Asia Society. There were around 30 instances of a country’s debt increasing by 40% or more over five years since the Second World War, he says, all of which reported deep economic trouble in the consecutive five years. In China, debt grew by 60% over the last five years, probably the fastest rate in recorded history. It takes USD 4 in debt to create USD 1 worth of GDP growth in China. In the first quarter last year, that number was as high as six to one. In America at the peak of the housing bubble in 2008, the comparable figure was USD 3 in debt for every USD 1 in growth.

In December 2016, the US Federal Reserve increased interest rates by 0.25% and outlined three future increases instead of the expected two, which could mean trouble for Beijing.
Higher interest rates in the United States could make it harder for China to manage its exploding debt —as the Asian giant increasingly depends on borrowing to keep growing — while simultaneously trying to block capital from fleeing for more fruitful shores in America, writes Ted Kemp for CNBC. "If the Federal Reserve [keeps increasing] interest rates in the United States, the single biggest casualty of that this time is going to be China, because there’s so much money just waiting to leave," said Sharma. China "is headed to debt outstanding as a percent of GDP to north of 250% vs 163% in 2008," said Peter Boockvar, chief market analyst at economic advisory firm The Lindsey Group. The Chinese government said it issued CNY 794.6 bn in new loans in November 2016, well above October’s CNY 651 bn. Meanwhile, total social financing in China, a broad measure of credit in the country, rose to CNY 1.74 tn in November, from CNY 896.3 bn in October. "This is out of control, as this is happening at the same time their growth rate is in secular decline," Boockvar said.

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