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ChartBrief 130 - China Debt & Leverage

The latest loans and monetary data out of China show a continuation of the story of adding more debt. Total social finance growth (the broadest measure of loan growth) is running steady at a monthly pace (standardized against GDP) and on a rolling 12-month basis is accelerating. This is consistent with the surge seen in early 2016 and again going into 2017 as the authorities have sought to encourage lending growth to prop-up economic activity. As noted the other day, this has worked well along side a couple of other trends e.g. property and exports, in stabilizing the economy.

Credit driven or counter-cyclical growth supporting measures more broadly are by nature temporary and unless there is a further surge in credit growth I'd expect all else equal for the positive cyclical growth impulse to fade into 2018. This would consistent with the messaging that Xi Jinping has been putting forward about deleveraging and restructuring/reforming the economy. The leadership transition later this year is likely a key factor in motivating the authorities to keep growth stable at least short-term, and it may become less of a priority into 2018 following the transition (at this stage expect little material changes within the leadership structure, perhaps some shuffling at the second tier of leadership).

So on the credit front it's a case of steady as she goes, or more of the same. From a debt to GDP standpoint this means an increasingly higher debt load, but the rate cuts of 2015 have made this load more sustainable or manageable in the medium term... the flip-side to that is China's economy is going to be increasingly interest rate sensitive. So for potential stress catalysts watch rates/borrowing costs.

Chinese total social finance growth as a % of GDP has been running fairly steady month-to-month and accelerating slightly on a 12-month rolling basis, reflecting growth supporting measures.

Total loans as a percentage of GDP have continued to rise, yet the interest rate cuts have helped at least notionally to make this increasing debt load manageable for now.

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