China Boosts Debt in December, the Market Doesn’t Buy It

January 15, 2016 Updated: January 15, 2016

Despite the efforts of investment bank analysts, the market just doesn’t buy the 14.4 percent increase in debt financing in the Chinese economy in December.

Theoretically, an increase in debt means higher growth, says Goldman Sachs: “Today’s figures suggest the overall policy stance remained supportive in December, which provided support to growth.”

Or according to Everbright Securities’s chief Economist Xu Gao: “China can use its savings to boost economic growth as long as it wants.”

So why is the Shanghai Composite down 3.55 percent to 2900, a level last seen in 2014? Why is the Dow Jones down 2 percent in early Friday trading?

Because boosting debt by 14.4 percent means very little in the deflationary Chinese economy.

“Chinese growth in recent years has been of extremely low quality. Productivity has only accounted for 5.7 percentage points of growth since 2008, with the rest coming almost entirely from investment. The result is that debt has soared to 282 percent of GDP,” writes Andrew Lees of Macro Strategy.

The amount of new debt China needs to generate a unit of GDP growth. (Macquarie)
The amount of new debt China needs to generate a unit of GDP growth. (Macquarie)

In other words, increasing debt and pouring the money into ineffective investment projects is counterproductive, at least according to the Academy of Macro Economic Research. It estimates the country wasted $6.9 trillion from 2009 to 2014.

If you waste money and don’t generate a return, you get lower and lower returns and at one point the debt will be impossible to pay back.

“You reach a peak level of debt, people will not be borrowing beyond that point,” says professor Steve Keen of Kingston University in London and author of “Debunking Economics.”

According to Macquarie research, China now needs to go $3-$4 in debt to create only $1 in GDP growth. “Unless there are significant structural shifts, China requires more than $2 trillion incremental debt to generate 5-6 percent nominal GDP growth.”

Well, according to the latest data, it looks like they are at least trying.