Whatever China seems to be trying to do, it doesn’t look like it’s working. When the country released some data on the amount of new credit, the results surprised everybody. Not only did aggregate financing fall to just $75B, which was lower than the number projected by all analysts, it was also just 45% of the median of the forecasts which expected approximately $165B of credit to have been extended during October.
Despite having cut the benchmark interest rates no less than six times in a limited time frame, China doesn’t seem to be able to jumpstart its economy again, and we fear this is a sign the Chinese overcapacity situation continues to persist.
Does this mean we should give up on China’s miracle of economic growth? Not at all, as China’s prime minister has once again confirmed his country is willing to increase the country’s GDP by deploying rather aggressive measures. Not only were the interest rate cuts an important signal, the PM now also said he was willing to reduce the corporate taxes in another attempt to boost output.
Source: tradingeconomics.com
Unfortunately, China can try to do whatever it wants but the truth is corporate and household debt levels have reached new heights. Whereas combined household and corporate debt stood at 125% of GDP during the global financial crisis in 2008, this level has increased to 208% now. The 65% increase already sounds impressive when compared to GDP, but when you’d look at it in absolute numbers, the total debt increased from $5.5 trillion to $22.36 trillion. That’s a 307% increase and definitely nothing to ignore.
It just looks like China might need a temporary break and instead of investing in above-average future growth rates, there might be a period of consolidation. This doesn’t have to take long and in just a few years’ time the total debt vs the GDP might already have reached a more acceptable level (as the GDP continues to increase but the level of debt will decrease).
