China’s leverage much higher than in 2008

SCMP:

In its financial stability report published in November, the People’s Bank of China said that total debt at an unidentified province was 80% higher than the debt level reported in its budget.

Moody’s estimate that the real liabilities of enterprises owned by local and regional governments could amount to 60 trillion yuan (US$8.69 trillion), more than 3x the on-budget debt that local and regional governments reported as of the last quarter this year.

In addition, China’s corporate sector remains highly leveraged, with lending to non-financial companies now at 160% of GDP – compared to 74% in the United States and 99% in Japan, according to estimates by Moody’s.

“Now, China’s policy room is significantly narrower compared to 2008,” said BBVA’s Xia. “The high debt level of the Chinese corporate sector and associated financial vulnerabilities have made the authorities more cautious about side effects of a massive stimulus.

Household debt in China has also ballooned in recent years. The household gearing ratio – the ratio of debt incurred by families to gross domestic product – surged to 49% at the end of 2017 from 17.9% at the end of 2008.

So maybe it’s not all Powell after all, though the Fed’s actions affect interest rates in other countries. Moreover, if the Fed’s rate raising causes a slowdown in US and global growth, which it will, the impact in highly leveraged economies will be disproportionate. Lending at 160% of GDP in China, versus 74% in the US, is a big deal.

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