Forget Argentina. The big story of 2014 in the emerging world is the black cloud of debt hanging over China.
Debate rages over how this tale will end. Most analysts believe that the Chinese economy will once again expand by more than 7 per cent this year, despite ballooning private sector debts. But the pessimistic minority has history on its side. Only five developing countries have had a credit boom nearly as big as China’s. All of them went on to suffer a credit crisis and a major economic slowdown.
These are powerful precedents. Recent studies have isolated the most reliable signal of a looming financial crisis and it is the “credit gap”, or the increase in private sector credit as a proportion of economic output over the most recent five-year period. In China, that gap has risen since 2008 by a stunning 71 percentage points, taking total debt to about 230 per cent of gross domestic product.
A credit boom of this scale is not likely to end well. Looking back over the past 50 years and focusing on the most extreme credit booms – the top 0.5 per cent – turns up 33 cases, with a minimum credit gap of 42 percentage points. Of these nations, 22 suffered a credit crisis in the subsequent five years and all suffered an economic slowdown. On average, the annual economic growth rate fell from 5.2 per cent to 1.8 per cent. Not one country got away without facing either a crisis or a major economic slowdown. Thailand, Malaysia, Chile, Zimbabwe and Latvia have had a gap higher than 60 points. All those binges ended in a severe credit crisis.
Although there have been no exceptions to this rule, most economists still believe China will prove exceptional. For 30 years it has defied sceptics, maintaining a growth rate that has averaged 10 per cent, and has not fallen below 7 per cent since 1990.
China has hit its ambitious growth targets so consistently that many analysts can no longer imagine a miss. The consensus forecast is for growth of 7.5 per cent this year, right on target. Growth is widely expected to continue at an average rate of 6-7 per cent for the next five years. It is hard to find a prominent economist who forecasts a significant slowdown, much less a credit crisis.
History foretells a different story. In the 33 cases in which countries built up extreme credit gaps, the pace of GDP growth more than halved subsequently. If China follows that path, its growth rate over the next five years would average between 4 per cent and 5 per cent.
The key to foretelling credit trouble is not the size but the pace of growth in debt, because during rapid credit booms more and more loans go to wasteful endeavours. That is China today. Five years ago it took just over $1 of debt to generate $1 of economic growth in China. In 2013 it took nearly $4 – and one-third of the new debt now goes to pay off old debt.
Those who trust in China’s exceptionalism say it has special defences. It has a war chest of foreign exchange reserves and a current account surplus, reducing its dependence on foreign capital flows. Its banks are supported by large domestic savings, and enjoy low loan-to-deposit ratios. History, however, shows that although these factors can help ward off some kinds of trouble – a currency or balance-of-payments crisis – they offer no guarantee against a domestic credit crisis.
These defences have failed before. Taiwan suffered a banking crisis in 1995, despite having foreign exchange reserves that totalled 45 per cent of GDP, a slightly higher level than China has today. Taiwan’s banks also enjoyed low loan-to-deposit ratios, but that did not avert a credit crunch. Banking crises also hit Japan in the 1970s and Malaysia in the 1990s, even though these countries had savings rates of about 40 per cent of GDP. Furthermore, there is no strong link between the state of the current account and the outbreak of credit crises.
The unravelling of the 33 most extreme credit binges before China’s suggests that it faces a serious risk of at least a major slowdown. Such an outcome may yet be avoided. But it is a long shot, even for an exceptional country such as China.
The writer is head of emerging markets and global macro at Morgan Stanley Investment Management and author of ‘Breakout Nations’
本文作者是摩根士丹利投资管理公司(Morgan Stanley Investment Management)新兴市场与全球宏观部主管，著有《一炮走红的国家》(Breakout Nations)。