Wednesday, March 3, 2010
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.