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China’s debt is slowly going out of balance and latest stimulus will make things worse for world’s second biggest economy. Back in 2007, China’s debt to GDP ratio was already at 155%, very high since China’s growth policy was driven by additional public spending or issuing fresh debt. But post-financial crisis world, it has clearly gone out of balance, as debt to GDP ratio rose to 260% as of last year.
Back in 2008, a new Yuan debt was necessary to generate one unit of growth but now that number has deteriorated significantly and now China needs about 4 unit of leverage to generate one unit of GDP. So recent stimulus is more likely to generate higher leverage than higher GDP.
If trouble occurs, China has the potential to take down the world, especially through its banking sector, which is largest in the world with $30 trillion assets.
Big four banks in China, ICBC, China Construction Bank, Agricultural banks of China and Bank of China are four largest bank in the world with more than $11 trillion in assets, which is more than China’s GDP. Now, China’s non-performing loans is calculated as 16% of total assets (official figure is 1.7%, which is very unlikely) then that’s a $1.8 trillion hit and with its ripple effects, potent enough to bring down china’s overall financial system.
China’s latest stimulus unlikely to do much good, in this regard. China will learn it the hard way that you can’t fight high leverage with higher leverage.
