Source: Emerging Advisors Group
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, Mark Rider 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
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
A network of investment professionals
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, Chief Investment Officer
Mark is responsible for delivering an overarching investment strategy, including asset allocation, investment themes, investment manager and product selection and monitoring for ANZ Wealth in Australia. Before joining ANZ in 2013, Mark spent 15 years at UBS and 10 years at the Reserve Bank of Australia, making him a well-recognised and respected member of the Australian investment community.
To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below
Contact us
Call us
Speak to the ANZ Private team directly
1800 316 926
We're available weekdays 9:00am to 6:00pm AEST
ANZ Private Bankers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ), the holder of Australian Financial Services Licence number 234527. This document ("document") is distributed to you by ANZ and may not be reproduced, distributed or published by any recipient for any purpose.
The information provided is general in nature only and does not take into account your personal objectives, financial situation or needs. Please consider its appropriateness to you before making any investment decisions. It should not be relied upon as a substitute for professional advice. For any product referred to above, ANZ recommends that you read any relevant offer document or product disclosure statement and consider if the product is appropriate for you. For products issued by ANZ, these documents are available at www.anz.com. This document is current as at the date of this publication but is subject to change. The document is provided and issued by ANZ unless another author is specified in the document, in which case it is provided and issued by that author. The views expressed are those of the authors only and do not necessarily reflect the opinions or views of ANZ, its employees or directors. Whilst care has been taken in preparing this document, ANZ and its related entities do not warrant or represent that the document is accurate or complete. To the extent permitted by law, ANZ and its related entities do not accept any responsibility or liability from the use of the information. Past performance is not indicative of future performance and any case study shown is for illustrative purposes only. Neither are a prediction of the actual outcome which will be achieved. Some of this information may have tax implications. We recommend that you seek specialist tax advice on how it may impact your tax obligations, liabilities or entitlements.