Using BIS credit data, we have calculated China credit intensity since 1994. Before the Global Financial Crisis, China needed on average one unit of credit to create one unit of GDP. Since 2008, 2½ units of credit are required to create one unit of GDP. In other words, it means that China needs much more credit than 10 years ago to have the exact same amount of GDP. Injecting more credit in the economy is not the miracle solution it used to be, and the disadvantages of credit push tend to surpass the advantages.
Higher credit intensity over the past years has directly fueled the debt engine. Public and household debts are at their highest historical levels, respectively at 51% of GDP and 53% of GDP, and the private sector debt service ratio is becoming a burden for many companies, reaching on average 19.7% This records an increase from 13% before the crisis.
On the top of that, the PBoC will probably refrain from massive easing as long as the real estate sector remains well-oriented. It is a key economic sector for China’s growth as it represents around 80% of Chinese people’s wealth. Completed investment growth in real estate has decelerated since last spring, but it is still at high level compared with previous years, running slightly above 10% YoY in last September.
We believe that high credit intensity combined with resilience in the real estate sector will push the PBoC to be in wait-and-see position until the end of the year and to adopt a fine-tuning policy in 2020 if needed. Contrary to previous periods of slowdown, notably in 2008-2010, 2012-2014 and in 2016, China is unlikely to save the global economy once again.
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