Now, who’s really in debt-trouble? The US or China?

For more than a century, the United States has been the world's biggest economy, accounting for over 24% of the world’s gross domestic product (GDP) in 2016, according to figures from the World Bank. But change is afoot, as this infographic from the Visual Capitalist shows … for more, go to 

Now, who’s really in debt-trouble? The US or China?

KUALA LUMPUR (December 2017): The Dec 13 Reuters report titled “US government posts US$139b deficit in November” is a real eye opener to the rest of the world.

No wonder President Donald Trump adopted an “inclusive” policy to keep the US afloat.

But, pro-US media and organisations continue to demonise and pour cold water over China’s efforts that are keeping and sustaining global economic growth.

An example is the Guardian Business’ Dec 7 report titled “China's debt levels pose stability risk, says IMF”. Is that so?

I Love Malaysia-China Silk Road reproduces an analysis titled “Fears of a Chinese Debt Crisis Are Overblown” by Michael Parker, Bernstein’s Asia-Pacific equity strategist, together with analyst Kelman Li for our readers’ balanced reading and information:

"US government posts US$139b deficit in November


Wednesday, 13 Dec 2017

WASHINGTON: The U.S. government reported a $139 billion deficit in November, the Treasury Department said on Tuesday.

That compared with a budget deficit of $137 billion in the same month last year, according to Treasury's monthly budget statement.

Economists polled by Reuters had forecast the Treasury recording a $134 billion deficit last month.

When accounting for calendar adjustments, the deficit last month was also $139 billion compared with an adjusted deficit of $137 billion in the same month in the previous year.

The deficit for the fiscal year to date was $202 billion, compared to a deficit of $183 billion in the comparable period for fiscal 2017. On an adjusted basis, the fiscal year-to-date deficit was $248 billion last month versus $222 billion in the prior year.

Receipts last month totaled $208 billion, up 4 percent from one year ago, while outlays were $347 billion, a 3 percent increase from the same month a year earlier.

Last week, Congress approved a short-term funding bill that will keep the government open until Dec. 23 but it has yet to agree on a longer-term budget.

The Treasury Department has a statutory cap on how much money it can borrow to cover the budget deficit that results from Washington spending more than it collects in taxes. It has been bumping up against that cap and only Congress can raise the limit.

A temporary measure that suspended the debt limit expired on Dec. 8, although the Treasury has emergency means to continue to pay all its bills through January, it has said.

At the same time, Republicans, who control Congress, are nearing approval of an overhaul of the tax system. Their legislation would add $1.4 trillion over 10 years to the $20 trillion national debt to finance changes that they say would further boost an already growing economy. - Reuters

China's debt levels pose stability risk, says IMF

Health check of financial system says reforms have not gone far enough and notes similarities to US before 2008 crisis

Financial security and supervision of banks in China has improved, says the IMF, but ‘risky lending’ is happening in other quarters. Photograph: Reuters
Larry Elliott Economics editor

Thursday 7 December 2017 01.00 GMTLast modified on Thursday 7 December 2017 15.30 GMT

Fears that China risks being the cause of a fresh global financial crisis have been highlighted by the International Monetary Fund in a hard-hitting warning about the growing debt-dependency of the world’s second biggest economy.

The IMF’s health check of China’s financial system found that credit was high by international levels, that personal debt had increased in the past five years, and that the pressure to maintain the country’s rapid growth had bred an unwillingness to let struggling firms fail.

IMF warns China over 'dangerous' growth in debt

While praising China’s president, Xi Jinping, for his commitment to improving financial security, the IMF said reforms by Beijing in recent years had not gone far enough.

“The system’s increasing complexity has sown financial stability risks,” the IMF’s assessment said. “Credit growth has outpaced GDP growth, leading to a large credit overhang. The credit-to-GDP ratio is now about 25% above the long-term trend, very high by international standards and consistent with a high probability of financial distress.

“As a result, corporate debt has reached 165% of GDP, and household debt, while still low, has risen by 15 percentage points of GDP over the past five years and is increasingly linked to asset-price speculation. The buildup of credit in traditional sectors has gone hand-in-hand with a slowdown of productivity growth and pressures on asset quality.”

The report said China should put less emphasis on targets for growth, which led to excessive credit expansion and higher levels of debt at local level; that it should beef up financial supervision and put increased emphasis on spotting risks ahead; and that it should gradually increase the amount of capital targeted banks should hold.

China was one of the prime engines of world growth when countries in the developed west were struggling during and after the financial crisis of 2008-09, but the expansion relied heavily on higher public spending and easy credit. Xi is trying to move China to a different model where growth is slower but more sustainable.

Adani coalmine project: China Construction Bank won't grant loan, PR firm says

The IMF supported this approach, noting that tensions had emerged in various areas of the Chinese financial system. There had been a commitment to supporting growth and jobs, coupled with pressures to keep non-viable firms open. The credit needed to stimulate higher growth had “led to a substantial credit expansion resulting in high corporate debt and household indebtedness rising at a fast pace, albeit from a low base”.

The IMF also noted developments in the Chinese financial system similar to those in the US in the years before the financial crisis of a decade ago. Supervision of banks had been tightened up but demand for high-yield investment products had led to attempts to escape regulations though increasingly complex investment vehicles. “Risky lending has thus moved away from banks toward the less well-supervised parts of the financial system,” the IMF said.

It added that risk-taking was encouraged by a reluctance among financial institutions to allow individual investors to take losses, an expectation that Beijing would bail out state-owned enterprises and local government financing vehicles, and efforts to stabilise financial markets in volatile times.

•Follow Guardian Business on Twitter at @BusinessDesk, or sign up to the daily Business Today email here.

Fears of a Chinese Debt Crisis Are Overblown

By Michael W. Parker and Kelman Li
May 11, 2017 11:48 p.m. ET

Over the last month, three proxies for Chinese credit-intensive growth – concrete, real estate and autos – have begun to reflect the inevitable: the rapid acceleration in credit growth that began at the end of 2015 has to end. Great Wall is down 10% in the last 30 days (and up almost 50% over the last 12 months); CNBM (a large concrete producer) is down 14% since mid-April (and up ~30% over the last year). Sunac, a Chinese property developer, has doubled since this time last year and is down 11% in the last month. The Chinese gaming sector is getting hit too. For reference, the MSCI China is up ~3% in the last month.

Commodities are taking a leg down as well. Oil is down -9% in the last month, coal -12%, iron ore -19%, copper -5%.

The problem – so to speak - is that the Chinese economic policy response over the last two years to the slow-rolling trauma of domestic market stock suspensions in July 2015, RMB depreciation in August 2015 and foreign currency outflows that winter is working. Or, more to the point, it worked. The efforts to use acceleration in credit growth to revive the industrial “Old Economy” in China, restore industrial profits (Exhibit 2) and end concerns about capital flight (Exhibit 3) worked. The next step is to slow that credit formation growth and tighten monetary policy. That means bad news for the M1-centric sectors (commodities, real estate, autos, and gaming) as China’s Old Economy slows.

Good News: It Worked. Bad News: It Worked

Each month we use a variety of Chinese industrial metrics as a real time gauge of the Chinese economy: power demand, rail freight, credit formation growth, truck sales, excavator sales, imports, exports, housing starts, manufacturing PMI. We combine the direction (Y/Y) of each of these indicators into an equal-weighted, naive metric of industrial activity in China.

Two years ago, those industrial metrics were almost entirely in the red (that is, falling year-on-year). The Chinese economy was still growing at ~7% because of the strength of the consumer. Industrial profits were shrinking. China Bulls (ourselves included) at the time concluded that this was simply the triumph of the New Economy. The industrial heartland would slowly rust in China as it had in the U.S. and Europe three decades earlier. Conversely, China Bears concluded that the government was lying about GDP growth as there was just too much industrial base and too much Old Economy in China for the New Economy to seamlessly take the wheel.

At the end of 2015, this was the battle line between the two views of China. Chinese policymakers concluded that they were not all that interested in seeing which of these two camps were correct and instead injected a trillion dollars of incremental credit into the Chinese economy in the first quarter of 2016 (Exhibit 4). This measure reaccelerated credit formation growth - which had been slowing, along with fixed asset investment growth - for the previous three years.

It worked. The industrial economy revived. Commodity prices globally bounced (Exhibit 5). Activity throughout the Old Economy in China picked up. The foreign currency reserve outflows each month slowed and have now turned into foreign currency reserve inflows for each of the last three months (Exhibit 3).

The next step is therefore – presumably – to declare victory. The acceleration in credit formation growth of the last two years removed the short-term risk to the Chinese economy that – to paraphrase - “no economy can take on this much debt in such a short period of time and not have a financial crisis”. The benign economic environment that China has entered suggests just the opposite: maybe China can.

The broader lesson is that the plumbing still works in China… and in the global economy. Inject credit into the Chinese economy, and you will get more iron ore, more steel, more power, more coal, more trucks, more excavators, more construction, more auto sales, and more gaming in Macau casinos. The assumed irreparable harm to various signaling mechanisms due to all that debt has not melted the underlying mechanics of the economy. Yes, the Bulls are less Bullish than two years ago because that debt does have to be paid back and the assumed political appetite and willingness to simply cut the Old Economy adrift does not, in fact, exist. But the Bears are also less Bearish than two years ago because the system is simply more resilient than was previously believed.

All that achieved, a prudent central banker will slow down the flow of credit in the economy and cool things down at this juncture. As we observed earlier in the year, the economy is more at the risk of overheating than a “Hard Landing”. Restrictions on property transactions and financing are already in place in large Chinese cities. Property prices in Shenzhen (among other places) are now down year-to-date.

Tightening has already begun

The PBOC has already begun the tightening process, looking at interbank and repo rates since the start of 2017. The 1-week Shibor and 7-day repo rates have increased by 39bps and 84bps, respectively. The interest rate corridor, with the Standing Lending Facility (SLF) rate as the ceiling and the rate on excess reserves at the bottom as the floor, has been tweaked as well. The SLF has increased by 20 bps (Exhibit 6).

Our China banks analysts, Wei Hou, has noted that the main goal of the PBOC is to clamp down on leverage in financial markets, particularly in the corporate bond market. We – as in Kelman and I – do not forecast interest rate hikes or changes in Reserve Ratio Requirements. The key metric for us is simply total social financing growth. Total social financing growth and fixed asset investment growth decelerated between the end of 2012 and the end of 2015. The acceleration credit formation growth accelerated in 2016 created the commodity-, energy- and construction-related rally last year. As that credit formation growth slows over the rest of this year and into next year, we believe expectations of just how healthy the industrial part of the Chinese economy can be while in the second half of a decade long transition of the entire economy to services will moderate.

It’s good news, but not unambiguous good news. The losers go back to being losers.

At the end of this deviation from the long-term structural trend, the Chinese economy is still transitioning to services. The longterm strategy of slowing fixed asset investment growth, slowing credit formation growth, talking down growth expectations, talking up the services sector and hoping that the hard infrastructure built over the last 15 years will support the services sector and the consumer is – we believe - all still in place. For the last two years, an easy credit environment has, as a short-term and episodic measure, been implemented to address the weak industrial economy. But the industrial economy is no longer weak. And the transition to services continues.

If things didn’t end badly…

That is all terrific news for the global economy and for Asian and Chinese equities. The near-term macro risk is off the table. The world’s second largest economy looks to be in pretty decent shape both in terms of industrial and consumer activity. The mechanics of fiscal and monetary policy in China still work. The capital flight risk has faded. But it is terrible news for the M1-centric parts of the economy.

For the 12 months, the dominant view has been that the Party Congress later this year reduces or even eliminates the risk of aggressive tightening in 2017. Why would President Xi risk it? And maybe that is true. But arguably that “put” is available only in the circumstances where the Chinese economy is barely hanging on and – for political cover – Xi Jinping needs the facade of economic strength. But that just does not describe China at present.

Yes, perhaps they tighten too swiftly and the ride down is bumpier than intended for the industrial economy, which infects the economy in general. Poor execution is always a risk, everywhere. However, the opportunity here – as we start to think about the end of the decade – is that China might just “get away with it”. If Chinese SOEs continue to cut capital spending even utilization of underlying assets improves and ROIC rises, their profitability goes up and they will generate more cash. That cash can be used to pay down debt. Bank non-performing loans fall.

In short: lots of debt, but no crisis. So, yes, tightening – in the form of a slowdown in credit formation growth - is likely in the second half. But that tightening is, in our view, the next step in the rehabilitation of Chinese policy making… and equity markets.

Written by Michael Parker, Bernstein’s Asia-Pacific equity strategist, together with analyst Kelman Li.
China: World largest economy!
Posted On : October 8th, 2014 | Updated On : October 9th, 2014
China just overtook the US to become the world’s largest economy, according to the International Monetary Fund. Chris Giles at the Financial Times flagged up the change. He also alerted us in April that it was all about to happen. Basically, the method used by the IMF adjusts for purchasing power parity, explained here … for more, go to