This chart beautifully (and also somewhat terrifyingly) illustrates the enormity of the level of privately held Chinese debt outside the financial sector. It is set to exceed 200% of GDP, reaching the level at which the Japanese ‘lost decade’ began, and approaching the levels that triggered the US subprime crisis and the Spanish economic slump.
“I chose this chart as I think it is the best summary of the underlying structural problems that have been building up in the Chinese economy,” says Daalder, who cautioned in the team’s 2017 outlook that the level of Chinese debt was a major threat to stability.
“Most people just get dazzled by the high growth rates, the excellent track record the country has with respect to urbanization, or the super-modern infrastructure that has been developed over the years, and expect this miracle to last. The truth however is that growth has been more and more dependent on leverage and debt. If history is anything to go by, China is living on borrowed time.”
“Rising debt does not have to be bad for an economy, as long as this debt is used to finance investments that enable the debt to be paid off. When an economy is still young and developing, there are plenty of projects that meet that target. However, when an economy starts to build infrastructure that is not being used (cities), or factories that only lead to overcapacity (steel), it is clear that the target is no longer being met. Sure, you can still push growth higher by investing even more, but this will only come back to haunt you later. There is no fixed percentage at which this happens, but if the private sector debt breaks above the 200% of GDP, it normally is pretty close to the tipping point, as the chart shows.”
“I would hope that the Chinese authorities pay heed to the advice given by the IMF, the BIS and the OECD to tackle the growing problem of non-performing loans in a coordinated fashion, restructuring the debt in the key sectors of the economy. In that case, the red line would start to decline in 2017. However, it looks more likely that the authorities will kick the can down the road until the 19th National Congress of the Communist Party, which will take in the Autumn of 2017. In that scenario, the red line will move even more into the danger zone.”
“So, investors should be cautious of the growth outlook for China, and the broader emerging markets.”
If a picture is worth 1,000 words, what value a chart that says it all? Robeco Investment Solutions spends many hours compiling charts to illustrate a current issue. Most are made in-house, while some are externally sourced. We asked the team’s three enthusiastic chartists – Lukas Daalder, Jeroen Blokland and Peter van der Welle – to name one that expertly depicts what they believe will be a major investor issue for 2017.
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.