China's Debt Bubble: Non-Financial Sector Debt At $26 Trillion

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Includes: CHN, CN, CNY, CXSE, CYB, FCA, FXCH, FXI, FXP, GCH, GXC, JFC, MCHI, PGJ, TDF, XPP, YANG, YAO, YINN, YXI
by: Disruptive Investor

I recently wrote that global non-financial sector debt has surged to $153 trillion as of 3Q15. Among individual countries, China has witnessed rapid leveraging since the financial crisis of 2008-09. In my view, the debt crisis is still to unfold for China and this article puts into perspective the scale of leveraging in the last few years.

After the financial crisis of 2008-09, China's manufacturing sector growth declined and the policy response was to flood the financial system with easy money. The gradual transition from production to consumption-based economy was however not possible through expansionary monetary policies and excess liquidity manifested itself in the form of a bubble in the real estate sector and also in equities.

However, there is little change in terms of policy response to slowdown as China's total non-financial debt continues to swell. As the chart below shows, China's non-financial sector debt was $26.0 trillion as of 3Q15 as compared to $4.2 trillion at the beginning of 2007.

Click to enlarge

An important point to note is that for the first nine months of 2015, China's non-financial sector debt has swelled by $2.5 trillion. With the economy showing clear signs of a renewed slowdown, I expect a surge in debt to continue through 2016.

While debt does little for real economic growth, it is certainly setting up China for a big banking crisis in the coming years. I would stay away from China's financial sector, as the worst is yet to come for Chinese banks.