You might have thought Asia’s debt growth started to slow in 2013. Not so: leverage rose across the region at roughly the same pace as before, if not faster. With most economies decelerating, this implies that the credit intensity of GDP growth has continued to increase as well. At some point, the region will have to wean itself off its addiction to debt.
Credit intensity, in essence, measures how much additional debt is required to generate extra GDP. So if credit growth exceeds nominal GDP growth, credit intensity is high: and if the gap widens, then credit intensity is increasing. That can signal deteriorating efficiency and a dependency on debt to sustain GDP growth, with obviously worrying consequences should the financial system clog up.
Over time, growth cannot be sustained simply by expanding credit
For Asia overall, debt touched another high last year, at 208 per cent of GDP compared with 192 per cent in 2012. That’s up just over 50 percentage points since 2008 – a rapid increase by any measure. Even excluding China, the ratio climbed from 172 per cent to 180 per cent last year.
What matters, of course, is not just the level of debt, but the speed it climbs. Since 2008, credit has grown especially rapidly relative to GDP in Singapore, China, Malaysia, Japan, Hong Kong, Korea and Thailand. However, in India, Indonesia and the Philippines, aggregate leverage has barely increased, partly reflecting government debt falling as a share of GDP while private-sector indebtedness rose.
Government debt is relatively large in Japan, Malaysia and India while household debt ratios have risen particularly quickly in Singapore, China (from low levels), Malaysia and Thailand.
But the change in debt over time is often as telling as the level of debt in a particular market. China has registered the region’s second largest rise in the debt-to-GDP ratio since the financial crisis but there have been brisk climbs in Japan (driven by government debt), Malaysia (households and government), Hong Kong and Singapore (bank lending to corporates), Korea (corporate bonds) and Thailand (households). By contrast, in Indonesia, India and the Philippines, the fall in government debt-to-GDP ratios roughly offsets the rise in private-sector indebtedness.
Part of the rise in Chinese credit was extended by non-bank entities. Such shadow bank lending – whether from trusts, finance companies, or other vehicles – accounts for about 40 per cent of the increase in total debt since 2008.
But despite its sharp growth, China’s non-bank lending is not much larger than what might be expected of an economy at its level of development. Non-bank lending in other Asian economies is growing too, meaning China no longer looks like too big an outlier.
Luckily, for now, the rise in Asia’s credit is relatively easy to finance. Global interest rates are near record lows, major central banks still have their foot on the gas, local inflation is subdued, banks are stuffed with deposits, and most Asian economies save in aggregate more than they invest. However, over time, growth cannot be sustained simply by expanding credit. Faster productivity growth is needed, not least as demographics become more challenging. We need reforms, reforms, reforms.
This research was first published on 19 May 2014.