While in Europe, the level of government debt is obsessed over by investors, in Asia the main focus has been on corporate debt.
Analysts at UBS led by Duncan Woolbridge and Niall MacLeod have been looking at this in the context of a probable US rate hike this month.
Asian central banks have tried to ease monetary conditions and keep rates low as part of the effort to make it cheaper for companies borrow and make debt repayments.
Here’s what the analysts said (emphasis ours):
For Asian economies a Fed hike next week would signal less policy room to rely on lowering rates to boost growth or manage debt service after a large credit expansion.
So we don’t expect a major correction, but this is not 2004 when Fed lift off accompanied a bull market in Asian equities. Instead the debt backdrop creates more of a grind — lower growth, weaker Asian FX, but one marked at least by low equity valuations.
UBS has stuck closely to the Asia “Debtopia” story, which as China’s economic growth depending on its access to debt. It’s an important point, especially when you consider this chart of China’s private and corporate debt pile outstripping that of the US in 2013:
Earlier this month they showed how Asia’s debt service ratio has risen despite the region’s falling interest rates.
This ratio shows that the amount of cash companies in China and Hong Kong have to pay to service their existing debts — in interest and coupon payments — is rising faster than their income is growing.
Here’s the key chart that shows how debt growth (in green) is outpacing gross-domestic-product growth: