This chart examines various scenarios for credit growth in the wake of the Chinese government’s recommitment to its 7.5 percent GDP target at the Central Economic Work Conference back in March.
The best case for China’s debt expansion this year, in our view, would involve Total Social Financing growth of about 18.4 trillion RMB, leading just the private sector’s debt burden to rise to close to 200 percent of GDP – a 15 percentage point increase for the third year running and an unprecedented pace of debt accumulation by Chinese standards. Moreover, it’s not unlikely that credit growth will sustain its current rate or increase further throughout the year – both leading to even higher debt levels than the aforementioned base case.
The key point to recognize is that as long as China’s current credit dynamics remain in play – and the credit intensity of growth continues to rise – fundamental reforms will necessarily have to be sidelined. This is the Catch-22 China finds itself in; the eventual extraction, when it comes, will be painful.