To be sure, since November 2013, all those numbers have grown substantially, especially at the ECB and BOJ but nowhere more so than in China, where a little over a year later, a famous study by McKinsey showed that not only has the world not delevered, but that the global “debt creation dynamo” was none other than China…

… whose debt/GDP has since grown to an even more astronomical 350% (and rising exponentially).

China’s – and the entire world’s – debt load was very much the highlight of the latest BIS quarterly report (profiled yesterday) in which we learned that the “BIS calls time on world credit binge” and that “China’s Leaders Put the Economy on Bubble Watch” even as these same leaders just raised their budget deficit forecast to its highest ever and previewed an even faster increase in its monetary aggregates or M2, which is now supposed to pick up to 13% per year, or roughly double China’s GDP growth rate.

So yes, China debt is growing well over 100% faster than its GDP, a condition which is precisely the opposite of Ray Dalio’s “beautiful deleveraging”, and the outcome is clear to all.

And yes, while two years ago few had a sense of the true proportion of China’s debt load, now virtually everyone does, which is why its credit creation will be put under a microscope.

But what does that mean in practical terms?

Simple: recall that it was China’s (and the entire EM sector) furious debt issuance spree in 2008 and onward that together with central bank QE, prevented the world from collapsing into an all out depression. But since China’s exponential credit growth delayed the inevitable, it also means that any slowdown in China’s credit growth (or outright debt destruction if and when the massive debt defaults and NPLs are finally recognized) will put the world right back into the deferred depression.

And here, courtesy of Macquarie’s Viktor Shvets, is the best encapsulation of the predicament the world finds itself in. From volume 52 of “What Caught My Eye”

Rising leverage levels (whilst positive initially) eventually turn to “poison”, as incremental benefit diminishes and in order to maintain growth rates, economies require an ever increasing infusion of credit and ever declining cost of capital.

Although not perfect there is a well-defined relationship between the overall level of debt and velocity of money. Each economy is different (both in term of structure and efficiency) and therefore the degree of tolerance to rising debt levels and associated volatility also differs; nevertheless, as a generalization, the higher debt levels and the faster pace of debt accumulation tends to coincide with lower (and declining) velocity of money.

…read more

Source: "In The Last Seven Years, China Accounted For 40% Of All Global Debt Creation"

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