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What happens when China dials back debt?


28 August 2018



China’s huge build up of debt after the global financial crisis was the locomotive that drove global growth. With the locomotive slowing, ANZ's chief investment office explores what happens next.

China, the world’s second biggest economy, built up huge amounts of debt after the global financial crises, with growth peaking at 30% in 2009. 

China credit growth

Source: Emerging Advisors Group


While the pace of growth has slowed since then, it has still outpaced the growth rate of the economy. As a result, the stock of debt has doubled to a little under 250% of GDP.

China credit as share of GDP

Source: Emerging Advisors Group

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Leveraging comes to an end

This rapid credit growth helped prop up post-GFC growth and supported investment markets. But China’s government has acknowledged that the earlier pace of credit growth was unsustainable. After undertaking another economic stimulus program in 2015 that pushed credit growth to over 20%, it has now more than halved to 8%.

What this means for markets

China’s ‘credit impulse’ is a measure of its changing growth of credit, relative to the size of its economy.

When you factor in a year’s lead time, China’s credit impulse shows a distinct correlation with returns from global equities over the last decade.

China credit impulse and % global equity returns

Source: Thompson Reuters Datastream, ANZ Wealth, Emerging Advisors Group


The moderation in equity returns so far this year is consistent with this trend of a fading credit impulse. There’s also been a sharp weakening in the credit impulse in recent times which can’t be ignored.

With the two largest economies – the United States and China – both implementing policy settings pointing to a slower economy, I believe an economic slowdown and weaker investment returns in 2019 look highly likely. Just how severe this slowdown will be is unclear right now, but we’ll be monitoring the situation closely. 


Read the full Investment Spotlight (PDF 457kB)


Mark Rider, former Chief Investment Officer

Mark brought over 30 years of investment market experience to ANZ, having previously worked at UBS and the Reserve Bank of Australia. During his seven-year tenure at ANZ Mark was responsible for and contributed to the overarching investment philosophy, investment strategy and asset allocation of ANZ Private Banking.


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