Chinese deleveraging could get very ugly

Jonathan Rochford

Narrow Road Capital

The biggest risk for the global economy is that debt levels are elevated. Rather than deleveraging after the financial crisis debt levels have continued to grow, particularly government debt. In 2009, governments bailed out banks, corporates and consumers with a range of capital injections, guarantees and stimulus measures. The risk is that when the next crisis arises no one will be able to bail out the governments. The growth in Chinese debts levels is particularly alarming. The graph below shows that the Chinese debt to GDP ratio increased by almost 50% in 2015. In January, this ratio increased by a further 5%. The average increase for this ratio globally was 2.6% per annum in the years since 2007. This staggering increase in debt levels is simply not sustainable when GDP is only increasing by 5-7% per year. No one can predict when this will end, but history shows that it cannot continue forever and that when it stops it will be very, very ugly.


Jonathan Rochford
Portfolio Manager
Narrow Road Capital

Narrow Road Capital is a credit manager with a track record of higher returns and lower fees on Australian credit investments. Clients include institutions, not for profits and family offices.

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