Even as we mark the beginning of the year of the rooster we believe China’s rising debt burden could ruffle some economic feathers in 2017. The consensus opinion remains that the leaders of the centrally controlled economy will continue to manage to ‘pull the right levers’ to keep GDP ticking along. Under the surface though, China’s sovereign balance sheet continues to deteriorate at an alarming rate.
The rate of credit expansion in recent years in China exceeds that of Spain and Ireland in the run up to their bubble peak in 2008, as well as that of the US during its mortgage boom and the increase in indebtedness in Japan during the 1980s. And although the starting point is very different from these earlier examples, at US$32tn, banking assets in China are now twice those in the US, despite the economy being 40% smaller. Furthermore, the misallocation of capital that has occurred is evidenced by the fact that continued strong increases in the use of credit have had less and less impact on growth – total social financing rose 11% year-on-year to November in US-dollar terms, but nominal GDP (measured in US dollars) increased by just 2% year-on-year in the 12 months to the end of Q3. We believe the contribution to world growth that has come from China means the potential for a greater slowdown matters not just for the Asian region but to economies and markets globally.
For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.
Iain Stewart – Newton, a BNY Mellon company