Wednesday, March 3, 2010

Chinese Leverage vs US Leverage

The folks who have been arguing that China has over-expanded and is due for a near-term crash generally make the argument that there is too much debt, and too much of it has been used to fund dubious projects (eg the empty city of New Ordos).  However, while there certainly are examples of spectacular misuse of funds, there's also lots of examples of reasonably well-thought out things (like the high-speed train and highway networks) and I have yet to see a compelling quantitative case that China is overleveraged and that the quantity of bad loans is likely to be material (feel free to correct me with references in comments), and given that international authorities are making reassuring noises, I've been maintaining an open mind on the question.

In an initial attempt to get a handle on the situation, I made the above graph, which is intended to look at the ratio of total debt outstanding to GDP over the prior year.  The Chinese data for total debt come from the People's Bank of China who report "At end-January, outstanding RMB and foreign currency loans by financial institutions totaled RMB44.02 trillion, up 31.02% year on year". I combined this with GDP estimates from the IMF for 2008 and 2009.

For the United States, Table D.3 of the Federal Flow of Funds Report gives total outstanding debt of 34.5 trillion USD in Q3 2009, and I divided this by the average of Q4 2008 through Q3 2009 GDP according to the Bureau of Economic Analysis.

Now, I admit that this is crude at best, since these things are certainly not measured in identical ways, and there is some possibility I am screwing up altogether due to lack of understanding of the relevant statistical releases (but it seems worth taking that risk in the hope of flushing out someone who does know what they are doing).  Furthermore, this is a comparison of total debt, and a China-bear could try to argue that the quality of Chinese debt is worse than the quality of US debt (though that would be a high bar).  And there is no doubt in my mind that the US is overleveraged.

Still, this seems like at least a small piece of evidence that China is significantly less leveraged than the US, and perhaps not at imminent risk of a bad debt crisis.  On the other hand, the ratio has increased very sharply in the last year, and that could not go on for too many more years.


rks said...

In my spare time I try to understand economics in terms that don't involve money, since money is very strange stuff. The first observation to make is that nearly all the stuff that is produced is consumed immediately [we assume that housing produces accomodation]. However it is not the people who produced stuff in that time that get to consume stuff. In America it is mostly people with historical rights to consume stuff plus people who promise to generate such rights in the future [money is a right to consume token]. In China a lot more consumption is by "society as a whole", i.e. government. Then you have to figure out what that means. Another important thing seems to be that the world wants what China makes more than vice versa: the same problem that led to the Opium Wars.

KLR said...

Ilargi - and Stoneleigh? dunno if they are permanently on the same page - put his case forth for Nay in mid Dec: The Automatic Earth: December 15 2009: Why China won't succeed America

I wanted to do this little history overview in order to look at the future. There are many voices out there who claim that China will be the next world power, as a kind of natural successor to America. I think not.

China has no domestic energy sources it can readily and swiftly put to use. It has to import all of its energy except for coal and a small amount of uranium. That's not a recipe for developing an empire. China has no domestic customer base. Its annual per capita nominal GDP is $3,300 vs $47,000 for the US. Its per capita consumption is $1,150 vs $32,900 for the US. Even if it would try, it would take decades to develop a viable domestic customer base.

Meanwhile, its foreign customer base is rapidly shrinking. China has risen over the past decades to where it is today because it could export its industrial output to relatively affluent societies in Europe and North America. These export targets are now dwindling and may well soon practically disappear altogether. The human talent to screw up fantastically in the face of free gifts has led them to implode simply and only due to the fact that not even the power of 800 men is forever satisfactory for one man, we always want more, and it was too tempting to borrow from the future. That's our present credit crisis in a nutshell. And China will dwindle right along with them, left with a hundred thousand factories designed to produce articles its own citizens don't want or need or can't afford.

China's recent rise has been that of a parasite, fully dependent on its hosts for survival while achieving its present state. There are no other hosts in sight, which means its people will be lucky if it would just retreat into hibernation. Alternatively, it may try to expand in the face of a world in general contraction, in which the last remaining weapons of mayhem, provided by a century of super-abundant cheap energy and dreams of a never ending growth of empire and domination, augment the overall chaos and deterioration. 1.3 billion pieces of cannon fodder may well seem too formidable an opportunity to not at least try for dominance. But a force the scale of the 20th century US it will never be, or at least not for a very long time, measured in centuries or even milleniums.

His/Their two cents. Likely some meaty stuff in the comments. I recall coming across stories about stuff that was beyond Bridges to Nowhere - more like the bridges in the Western Theatre of WWII that were blown up every day and rebuilt at night. Are things like that and Ordos and the New Mall in of themselves symptomatic of a cliff? We in the US had this decade of Real Estate Values Gone Wild, does something like that hold up in comparison?

Dave 'Heading Out' Summers had some posts about what he saw on his visits to the PRC, too.

Stuart Staniford said...

Mmm - "may well soon practically disappear altogether". Fast crash doomer alert. These guys have been predicting the western world would disappear in a puff of smoke for a while now: I didn't buy it a couple of years back, and it looks even less likely now.

aubrey said...

Stewart, While I agree with your general proposition that China is not as leveraged as is the US, your numbers for US debt are not quite correct. The $35 trillion or so you cite is Domestic, non financial private debt only. To that (from the same table) you must add foreign debt of about $2 trillion and Financial Debt of about $16 trillion for a total of about $50+ trillion, giving a Debt/GDP ration of > 300%. I am a little confused about double counting in the area of "financial debt" because I am not exactly certain what"finacial debt" means. However enough economists I trust (eg Rogoff) seem to include this "financial debt" as part of the total US debt, that I feel comfortable using it.