America, China or the Eurozone: Whose ass is the debt?

In 2021, the total size of the global economy was $96.1 trillion.

Among them, the US, China, the EU and Japan alone accounted for US $62.7 trillion, accounting for nearly two thirds.

Picture

Data source: World Bank.

So —

To talk about the state of these four economies is to talk about the state of the global macro economy;

Talking about the macro debt of these four companies is basically talking about what the global macro debt situation is.

Internationally, the macro debt of an economy is usually divided into four sectors: Resident sector, non-financial enterprise sector, financial sector and government, among which the debt of the resident sector + non-financial enterprise sector is usually regarded as “total debt of the private non-financial sector”, the debt of the resident sector + non-financial enterprise + government is usually regarded as “total debt of the real economy sector”, while the debt of the financial sector can be regarded as the mirror of debt of the real economy sector.

Among them, it is the debt leverage of the household sector and non-financial enterprise sector that is closely related to the real economy and directly affects the economic situation of a country in the short term, while the debt leverage of the government sector and financial sector has a greater impact on the potential economic growth in the future.

Let’s look at them one by one.

The chart below is a comparison of household sector debt in four big economies.

Picture

Data source: Eastern Wealth choice, National Balance Sheet Research Center (CNBS).

On the face of it, the big four economies are all about the same in terms of debt-to-GDP leverage in the household sector, with the US slightly higher and China, the euro area and Japan all very close.

However, this figure does not show the real debt stress in the household sector.

The reason is that GDP is a total economic size data, and the income distribution of various macro sectors in economic development is very different:

China’s total household disposable income is less than 50% of GDP;

In Europe and Japan, household income as a share of GDP is around 60 per cent;

The disposable income of the US household sector even maintained over 70% of GDP for many years.

As a result, America’s household sector can take on a much higher share of debt than other countries.

Therefore, if the household sector debt/disposable income perspective is used to observe the household sector leverage ratio in China and the US, it is completely different.

Data sources: Eastern Wealth choice, National Balance Sheet Research Center (CNBS), People’s Bank of China.

In view of the fact that only the disposable income of the household sector can be used to pay the principal and interest of the debt, the current debt pressure of China’s household sector is actually the highest among the four major economies if we compare the disposable income of the household sector with the debt.

Consider, too, the debt of the non-financial corporate sectors of the four largest economies.

Clearly, debt in China’s non-financial corporate sector is among the highest in the world and has risen since the end of 2021.

Under the modern credit economic system, economic growth mainly depends on the credit drive of enterprises and households. If China’s households and enterprises have increased their leverage to a level far higher than that of major economies in the world, it is doomed to worry about China’s economic growth in the future.

Of course, some people have said that most of the debts of non-financial enterprises in China are state-owned enterprises, which means that a considerable part of the debts are of the nature of government debts, such as the extremely large debt of the City Investment Corporation (the balance of interest-bearing debt of the City Investment Corporation is 56 trillion Yuan at the end of 2021, equivalent to 49% of GDP). Basically, they can be counted as hidden debts of local governments.

Even if the debt of Urban Investment Corporation is completely excluded, the macro debt leverage ratio of China’s non-financial companies is 110%, very close to that of Japan and the euro zone, and much higher than that of the United States — so China’s corporate debt leverage ratio is the highest in the world when compared with four major economies.

Data source: Wealth choice East.

According to the World Bank’s definition of “general government debt”, government macro debt leverage at the end of 2021 was 122.2% in the US, 72.2% in China, 107.4% in the euro area and 234.7% in Japan.

There is no doubt that Japan has a clean SLATE of government debt, almost twice that of the United States and Europe and three times that of China, whose debt is, on the face of it, the healthiest of the big four.

Unfortunately, as we mentioned earlier, urban investment bonds are basically hidden local government debt. If we add this debt to government debt, China’s government debt leverage reaches 121%, which is almost the same as that of the United States.

As mentioned above, the high debt of the household sector and non-financial enterprises will affect current economic growth. And government debt per GDP is too high, which affects future potential economic growth.

Over the past 30 years, for example, the economies of Italy and Japan have stagnated, not growing in size in nominal dollar terms, but actually shrinking — because Italian and Japanese government debt was the first in the developed world to exceed 100 percent, and thus became examples of overleveraged government debt.

Further, if the total debt of the three sectors of the real economy is added together, it can be seen that the total debt leverage of the four economies is compared at present.

Picture

Clearly, in terms of total debt position, Japan is still riding the dust far ahead of the other three economies, at 420%, compared with roughly the same figure in the US, Central Europe and Europe, at around 280%, with China slightly ahead of the US and the Eurozone.

According to the above analysis, we can draw a conclusion by combining this table:

The Japanese government is under the most debt pressure, followed by the US government and the Chinese government is the most relaxed;

Chinese companies have the most debt pressure, followed by Japanese companies and American companies.

Chinese residents were the most stressed, followed by Japanese residents and Americans.

To put it more simply, the lion’s share of macro debt in Japan, the US and the Eurozone is up the government’s ass, while the lion’s share of macro debt in China is up the corporate ass.

 

Leave a Reply

Your email address will not be published. Required fields are marked *