In 2015, a picture of a Chinese fruit vendor trading stocks with a laptop at his stall went viral on social media. The number of Chinese with margin trading accounts — in which investors are extended huge amounts of credit to bet with — had exploded so far that even street-market grocers felt it was normal to place leveraged bets on equities.
It became a bit of a symbol of the economic and financial turmoil in China and much of the rest of the developing world: Growth has slowed, but debt is sloshing around like never before.
Goldman Sachs recently published a piece of research that boldly described events in the world’s emerging markets, or EM, as the “third wave” of the financial crisis that began in 2008.
The first wave was the US subprime-housing crisis, and the second wave was the eurozone sovereign-debt crisis.
Emerging markets are undergoing what is euphemistically referred to as rebalancing. China is the biggest part of this move, as its economy shifts away from government-driven investment toward consumption.
The past several years of monetary-policy easing in the advanced economies led to enormous capital flows into emerging markets, as cheap money was borrowed to invest in countries where growth was faster than the sluggish pace of the West. Those days are coming to an end. And that puts the developing world in a bind.
Commodity prices — the backbone of EM economies — surged during the 2000s. Even after the financial crisis, commodities rallied from early 2009 into the middle of 2011. Since then, prices have slumped by nearly 50%.
Goldman suggests that the “high levels of debt risk” could push countries into “a tailspin that threatens global growth.” That’s not their expectation, but it’s the concern.
Even since the financial crisis, the world has racked up another $50 trillion in debt outside the finance sector, much of which is owed by corporations in the developing world. We’ll find out how those newly leveraged businesses cope with their growth slowdown only as it happens over the coming years.
Here we show what’s happened to emerging markets and why people are starting to worry about it:
Emerging-market debt has rocketed since the crisis, while developed-market debt has dipped since its 2009-2010 high. (EM debt, however, is still considerably lower than that of DM.)
China’s debt levels have surged particularly rapidly. As a proportion of gross domestic product, debt accelerated moderately from the turn of the century. In 2007, it was 121% of GDP. Today it’s more than twice that — 282%. In the wake of the financial crisis, the government encouraged increased borrowing, which is now particularly visible in the corporate sector’s debt.
Not only is debt rising, but China’s natural rates of growth are slowing. This chart shows growth falling to 6% by 2017, which would be a multidecade low. That’s one of the more optimistic forecasts for the next few years. Other economists think the country’s transformation will cut growth even further than that.
The explosion in China’s corporate debt is astounding. As a proportion of GDP, the rise since the third quarter of 2008 is more than twice and the next-largest increase in the developing world (Turkey).
Debt accumulation by financial institutions has been a little bit more reserved, but the country still tops the list for the most borrowing since the middle of 2008.
Nowhere is that more visible than in the commodity-reliant sector. On these charts from Macquarie, 100% on the y-axis illustrates the point at which a company’s entire profit is overtaken by debt interest payments. Back in 2007, very few companies were in that situation.
Fast-forward to 2014 and the sector is telling a very different and much more worrying story. Not only is the total stock of debt in the sector up by more than 300% in seven years, about half of companies have debt interest payments twice as high as their earnings.