No one knows if it’s a hand grenade or a nuclear warhead…
The ramp up in Chinese debt accumulation has been a leading concern of investors for years. The average total debt of emerging market economies is 175% of GDP, and skyrocketing corporate non-financial debt has launched China far beyond that number.
The real question is: by how far?
The answer is disconcerting, as VisualCapitalist’s Jeff Desjardins warns, because nobody really knows.
If the Chinese debt bomb is detonated, the impact on markets is anybody’s guess. Kyle Bass says the losses would be 5x that of the subprime mortgage crisis, while Moody’s says the bomb will be safely disarmed by authorities far before it goes off.
CHINA’S DEBT BOMB: THE PAYLOAD
Mckinsey came out with a widely-publicized estimate of China’s debt at the beginning of 2015. Using figures up to Q2 2014, they estimated that total Chinese debt was 282% of GDP, an increase from 158% in 2007.
Total debt is made up of various components, including government, corporate, banking, and household debts.
In the case of China, it is corporate debt that is particularly explosive. According to Mckinsey, the country’s corporate sector already has a higher debt-to-GDP than the United States, Canada, South Korea, or Germany, even while still being considered an “emerging market”.
DEFUSING THE BOMB
If there’s something that can ignite the fuse of China’s debt bomb, it’s non-performing loans (NPLs).
An NPL is a sum of money borrowed upon which the debtor has not made scheduled payments. They are essentially loans that are either close to defaulting, or already in default territory.
China has an official estimate for this number, and it is a benign 1.7% of debt. Unfortunately, independent researchers peg it much higher.
Full article: China’s Debt Bomb: No One Really Knows The Payload (Zero Hedge)