Want to know why everyone is obsessed with China’s massive debt buildup?
Goldman Sachs analyst Andrew Tilton and his team just published a note on that topic, which contains three charts that really sum the whole thing up.
China’s debt load is growing, but its economy is slowing.
Right now, that seems to be working out OK. Tilton’s theory is that new credit growth is a proxy for economic growth — business and consumers borrow money because they need it and have the cashflow to service the debt, and that economic activity is good for GDP (remember that some of the old debt is retired each quarter, too).
But … sceptics worry that China won’t be able to grow its way out of debt forever.
China issued $1 trillion in new credit in Q1 2016. One. Trillion. Dollars:
China’s ongoing debt is nearly 270% of GDP:
And the economy is slowing:
Just to be clear, Tilton is largely bullish because he believes that credit growth is greasing the wheels for the Chinese economy in a good way. But he adds this caveat:
While this seems likely to provide at least some boost to investment and activity in the near term, it also raises questions of sustainability over the medium term, given the already-large increase in China’s debt-to-GDP ratio in recent years.