Stratfor: China’s Economy is Living on Borrowed Time

Summary: Ripples of Trump’s win rock the boats of


China’s Economy: Living on Borrowed Time
Stratfor, 21 November 2016.


  • Barring a decision to loosen government controls on credit, investment and home purchases, China’s housing and construction sectors will slow in 2017.
  • Industries that hold the bulk of China’s outstanding corporate debt, including commodities, building materials and other sectors related to construction, will bear the brunt of a sustained housing slump.
  • Sluggish construction growth and skyrocketing debt, coupled with sharp reductions in debt maturity periods, could cause corporate defaults and bankruptcies to spike next year, testing Beijing’s legal and institutional abilities to cope with them.
  • Meanwhile, increasing U.S. protectionism and other international developments could put even more pressure on the Chinese economy, forcing Beijing to trade its economic reforms for greater spending to keep the economy afloat.


Next year is shaping up to be a decisive one for China’s economy. In the eight years since the global financial crisis struck, the vitality and importance of low-cost exports — the kind the Chinese economy used to rely on — have steadily declined. Scrambling to prop up the country’s growth and protect its near-universal employment, China’s leaders have embraced monetary and fiscal stimulus measures, causing the country’s outstanding debt to balloon to almost 250% of gross domestic product. Corporate debt, by far the largest share of China’s total debt, has likewise surged by more than 60% to top 165% of GDP. Now, a nationwide debt crisis looms at Beijing’s doorstep amid business defaults and bankruptcies, low industrial profits, winnowing returns on investment and the very real prospect of yet another slowdown in the real estate sector. How well Beijing manages these problems in the months ahead will, to a great extent, determine China’s economic, social and political stability for years to come.

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Stratfor: China Is Building Its Future on Credit

Summary: China, like the US, has surprised the bears by the resilience of its economy. Here Strafor examines one source of its economic strength, one that might haunt its future — massive and imprudent accumulation of debt.


China Is Building Its Future on Credit
Stratfor, 20 July 2016


As China tries to overcome slowdowns in its industrial and trade sectors, the country’s banks have continued to increase the pace of lending, issuing 1.38 trillion yuan ($205.8 billion) worth of loans in June. The figure confirms some economists’ expectations that lending will keep rising as China’s central government attempts to revive economic growth and boost property markets that showed signs of another slump in May. It also indicates that despite Beijing’s repeated pledges to reduce the economy’s reliance on credit and state-led investment, the easy flow of financing from state-owned banks remains the country’s primary bulwark against widespread debt crises among corporations and local governments.

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Harsh truths about the Federal debt, showing how Left & Right lie to us

Summary: Each presidential campaign season the federal debt becomes an issue, with the debate consisting largely of bogus soundbites. Each election sees that the federal debt has not only grown, but has grown faster than the US economy — with little to show for it (e.g., our public infrastructure rots). This will not end well for us.

The big picture: the ratio of federal debt to GDP

Gross Federal Debt to GDP

First insight: massive debts can be paid down with steady growth and moderate inflation (especially easy with long-maturity fixed rate debt), proving that conservatives forecast of certain debt doom are false. Second insight: this trend will cause problems if not stopped (left-wing economists will deny this until the crisis begins).

Focus on events since 1980.
See how the government’s debt to GDP ratio rose under Reagan & Obama.
See America’s steady bipartisan leadership!

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NBER: rapidly rising household debt predicts recessions. See America’s future.

Summary: Perhaps the most important frontier in microeconomics is the effect of debt on growth, especially private sector debt (government debt has different dynamics). Many economists have attempted to integrate debt levels into mainstream theory (e.g., Hyman Minsky). While so far unsuccessful, research has produced many useful insights. Here is a new study with a powerful conclusion: “An analysis of business cycles in 30 mostly advanced economies finds that burgeoning household debt is a strong indicator of an impending economic downturn.”  {1st of 2 posts today.}

This is a follow-up to Fact & myth about the debt supercycle, a story of modern America.

Household debt vs GDP Growth

Look at the end of this article to see America’s ratio of household debt to GDP.

“Household Debt and Business Cycles Worldwide”

By Matt Nesvisky in the January 2016 Digest
of the National Bureau of Economic Research. Reposted with permission.

An increase in household debt in relation to a country’s GDP is, at least in the short to medium term, a strong predictor of a weakening economy, according to an analysis of data from 30 nations by Atif R. Mian, Amir Sufi, and Emil Verner. The researchers use slowing growth and rising unemployment as key indicators of weakening. They find that the household debt factor is a better predictor of downturns than the debt of non-financial firms.

In “Household Debt and Business Cycles Worldwide“, the researchers analyze databases from the Bank for International Settlements, the World Bank, the Organization for Economic Cooperation and Development (OECD), and the International Monetary Fund (IMF) over the last half-century. They find that a rise in household debt, largely produced by more readily available credit, is a valuable forecaster of a contracting economy, citing as a prime example the growth of household debt in the early to mid-2000s and the slowing of global growth in the latter part of that decade.

The researchers see lower credit spreads and increases in risky debt as primary factors driving the rise in household debt. The availability of cheap credit spurs borrowing to finance higher consumption. In particular, household spending as a share of income rises during household debt booms, as do total imports and the share of consumption goods in total imports.

The expansion in household debt is followed by a sharp slowdown in GDP, consumption, and investment growth. This slowdown is not anticipated by professional forecasters at the IMF and OECD, giving household debt the ability to predict growth forecast errors.

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Fact & myth about the debt supercycle, a story of modern America

Summary: The effects of debt are among the most widely misunderstood factors of macroeconomics. The almost delusional writings of perma-bears and conservatives have demonized debt, while economists often regard high debt levels with complacency. Yet economists have learned much about dynamics of debt. This post looks at this cutting edge of economic theory, very relevant to us today — because the debt supercycle is the story of modern America, and it’s over.  First of 2 posts today.

“In final examinations {this economics} professor always posed the same questions. When he was asked how his students could possibly fail the test, he replied simply ‘Well it is true that the questions do not change, but the answers do.’
From a speech by Fed Chairman William McChesney Martin Jr., 19 October 1955.

This is the effectiveness of debt in America.
Can you spot the when the post-WWII economic era ended?

private sector debt

The ratio of private sector debt to Gross Domestic Income rose steadily since WWII (after forced deleveraging during the Great Depression and WWII). This was one of the four big growth drivers — along with the increase in US government debt, the population boom (babies + immigration), and rising productivity.

This long expansion is the debt supercycle, first identified in the early 1960’s by Hamilton Bolton and Tony Boeckh of Bank Credit Analyst. Here is the BCA’s explanation. It’s the story of modern America.

“The Debt Supercycle is a description of the long-term decline in U.S. balance sheet liquidity and rise in indebtedness during the post-WWII period. Economic expansions have always been associated with a build-up of leverage. However, prior to the introduction of automatic stabilizers such as the welfare state and deposit insurance, balance sheet excesses tended to be fully unwound during economic downturns, albeit at the cost of severe declines in activity.

“Government policies to smooth out the business cycle were successful in preventing the frequent depressions that plagued the pre-WWII economy, but the downside was that the balance sheet imbalances and financial excesses built up during each expansion phase were never fully unwound.

“Periodic “cyclical” corrections to the buildup of debt and illiquidity occurred during recessions, but these were never enough to reverse the long-run trend. Although liquidity was rebuilt during a recession, it did not return to its previous cyclical high. Meanwhile, the liquidity rundown during the next expansion phase established new lows.

“These trends led to growing illiquidity, and vulnerability in the financial markets. The greater the degree of illiquidity in the economy, the greater is the threat of deflation. Thus, the bigger that balance sheet excesses become, the more painful the corrective process would be. So, the stakes have become higher in each cycle, putting ever-increasing pressure on the authorities to reflate demand, by whatever means are available. The Supercycle process is driven over time by the building tension between rising underlying deflationary risks in the economy, and the ability of policymakers to create inflation.

“The Supercycle reached an important inflection point in the recent economic and financial meltdown with the authorities reaching the limit of their ability to get consumers to take on more leverage. This forced the government to leverage itself up instead.”

The rise is best seen in terms of standard credit measures, such as debt to income. This graph shows the ratio of US private sector debt to national Gross Domestic Income. There were two steep rises: 1984 to 1986 (the Reagan expansion) and a larger rise starting in 1997 — ending in the 2007 crash. The large drop after the Great Recession was the first act of the new era that follows our 50-year-long party.

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Auto loans: once a boon for America, now a bane

Summary: One of the many oddities of this cycle is that many things that were good during the post-WW2 era have become bad in the new era now starting (unrecognizably so, as we remain unaware of our changed circumstances). Like debt. As we see with auto loans, once useful — now malignant. Our use of debt also gives clues to our future.

Consumer debt head volcano



  1. Consumer debt in the old world, and the new
  2. Automobile sales point to our new world
  3. The terms are very easy
  4. Why are these numbers important?
  5. For More Information

(1)  Consumer debt in the old world, and the new

During the post-WW2 era increasing debt supercharged economic growth for the young and rapidly-growing West. But after 60 years of this our societies now carry massive debt loads, both public and private — while the numbers of elderly grow (who experience a crash of income upon retirement, plus rising costs to society for their pensions and health care). Carrying our current load might prove difficult; adding to it now is madness.

Plus, there are other factors in play. Fifty years of growing inequality, for still poorly-understood reasons, have hollowed out the middle class — diminishing their ability to carry their existing debt, making them dependent on borrowing to maintain their lifestyle.

Some take another step beyond borrowing. Borrowing to buy cars and homes results in slowly accumulating equity, one of the most common ways middle class households save. Increasingly Americans abandon buying with debt for renting. Rent homes instead of owning. Renting cars (leasing) instead of owning.

(2) Automobile sales point to our new world

Accelerating borrowing was a natural leading indicator of economic recoveries during the post-WW2 era. So economists see the waves of desperate borrowing by consumers since 2000 as a good thing. Hence their excitement about the subprime lending boom that drove the housing bubble. Such as today’s subprime borrowing to buy cars.

The extreme case of this blindness to our changed conditions is glee about the shift to renting cars (aka leasing). It shows vibrant demand for cars! As we see in this excerpt from a report by BofA-Merrill global economist Ethan Harris, 6 August 2014, showing that after mid-2012 leasing grew faster than total spending on vehicles (2012 saw many such transition points for the US economy).

BofA Merrill graph: auto leasing
Auto leasing: BofA Merrill graph, 8 August 2014

Households go for the low capital option: leasing soars:

Household outlays on leasing are booming at a 20% yoy pace — a clear sign that demand for vehicles is alive and kicking. With average lease payments lower than typical monthly ownership costs and with a down-payment not typically required to enter into a lease, the surge in vehicle leasing is likely a sign that financial restraints are still holding back some would-be buyers. Thus, as the economy improves, bottled-up household demand for vehicles could translate to higher sales.

Yes, in our society demand is “alive and kicking” by subprime households for cars bought with low-rate loans on easy terms — or even just renting (aka leasing). But does it point to an economic recovery — or exhaustion?

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Debt unleashed again to ravage America: out of control auto lending

Summary: Let’s look at the small and large implications of the auto loan boom.  It’s an example of our inability to learn, resulting in our credit-driven business cycles. Corporations profit from more sales and interest charges. People suffer from excessive debt burdens, and bankruptcies. Governments run deficits from the eventual busts. So it goes cycle after cycle since the New Deal era regulations were removed. Perhaps eventually we’ll learn, and a new era will begin.

Subprime auto loans


  1. Auto lending
  2. Larger lessons
  3. For More Information

(1)  Auto Lending

Madness is the failure of bankers and regulators to learn from the bankers’ imprudent greed that caused the housing bubble — and bust. With results we see  today in auto lending.

… average automotive loan term reached an all-time high of 66 months … loans with terms 73-84 months grew to 25% of all loans originated during the quarter. …

The average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year. In addition, the average monthly payment for a new vehicle loan reached its highest point on record at $474 in Q1 2014, up from $459 in Q1 2013.

… Market share for nonprime, subprime and deep subprime new vehicle loans in Q1 2014 rose to 34%.

Experian Automotive, 2 June 2014

A seven year car loan! Long-life loans to subprime borrowers is a recipe for defaults. Fortunately lenders have another line of defense: the equity of the collateral — because the Loan to Value (LTV) ratio of the car is well below 100%. That’s just common sense. Except in mad 21st century America, as seen in this data from the Semiannual Risk Perspective, Office of the Comptroller of the Currency, Spring 2014 (red emphasis added):

Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available. … Average LTV rates for both new and used vehicles are above 100% for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing.

Loan-to-value for auto loans
Semiannual Risk Perspective, OCC, Spring 2014


Long new car loans to subprime borrowers, made with loan/value ratios over 1. The car is deeply under water as it rolls off the lot, and for many years following. At least subprime mortgage bankers expected home prices to rise; these lenders cannot even hope for that. So what happens when these loans go bad?

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