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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.