In China, It Only Takes 11.9 Units of New Debt to Create 1 Unit of Additional GDP

Allow us to be not impressed by China’s recent “meeting” of GDP expectations. It’s true that China’s real GDP printed 6.7% YoY in line with estimates, published just 11 business days after the end of the quarter, and calculated to the highest degree of accuracy we are sure. It’s also true that that GDP growth was arrived at in a way that entirely contradicts China’s own stated goal of rebalancing it’s economy to be less investment driven, and was the result of an absolutely massive amount of new debt issuance.

Take for example, the first chart below showing the growth in fixed asset investment broken out between the total (blue line), the state owned sector (red line). The growth rate in state owned enterprise fixed asset investment has more than doubled in three months, rising from 10.7% YoY to 23.3% YoY. Meanwhile, the growth rate of fixed asset investment as a whole is not slowing as it must if the economy is to rebalance, but is now rising again.

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But the growth in fixed asset investment is a sideshow compared with the quantity of new debt issuance that was required to manufacture the GDP number. In the next chart below we show the one year difference in bank loans outstanding (the red area in the chart) overlaid on the one year difference in total nominal GDP (the blue bars). Yes, you are reading the chart correctly…yuan bank loans increased 12.6tn year over year while GDP increased a mere RMB 1.1tn. That equates to 11.9 units of new credit for each new unit of GDP, as the final chart shows. Importantly, this 11.9:1 ratio also assumes nominal GDP actually increased by RMB 1.1tn and was not in any way overstated. We will leave the readers to draw their own conclusions about the long-term effects of this type of growth strategy.

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