China's debt is worse than everybody else's ... except pre-crisis Ireland

China’s private debt load has grown so large it is now second only to that of Ireland’s back in 2008, according to Credit Suisse analyst Andrew Garthwaite and his team.

That was right before the Irish property bubble burst, pushing nearly half of the nation’s housing mortgages under water and tripling unemployment.

And China’s property sector is in a bubble, Garthwaite says.

The People’s Bank of China has been pumping money into the economy in the form of cheap and generous credit for private and state-owned enterprises alike. China added $1 trillion in new debt in Q1 2016 alone. That is having a distorting effect, Garthwaite wrote in a recent note to investment clients:

Credit to GDP over a seven-year period has increased more than any other country (apart from Ireland previously) and the credit multiplier has fallen by 75% (with credit growth of 13.4% being understated, in our view, and generating only 7% nominal GDP growth); the investment share of GDP is 44% (and has been higher for longer than for any other country); real estate appears a bubble; and exports, financial services (which accounted for a quarter of GDP growth last year) and demographics are all much less supportive.

Here is what that looks like in a chart:

The seven-year change in private sector debt to GDP in China has been comparable to previous changes in Thailand and Spain prior to their crises

And this is how China’s credit has grown ahead of its GDP since 1996, according to CS:

Total debt to GDP is now 36 percentage points above trend

But it could be worse! It could be Ireland, where debt peaked at 641% of GDP, Garthwaite says:

… Over a seven-year period, only Ireland saw a bigger increase in the credit relative to GDP. Credit is now 36 percentage points above trend. It is the speed of credit growth as much as the magnitude of growth which matters according to the BIS [Bank of International Settlements] (which, in passing, states the ‘danger point’ historically has been when credit to GDP rises to be more than 10% above trend). The aggregate level of leverage at 246% of GDP on BIS data is above that of the US and significantly above the level where it should be given China’s level of GDP per capita.

Maybe it will all turn out fine, and China will “muddle through.”

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