Comparison of Systemic Risk in China, US, Eurozone: Systemic Risk is Everywhere

China leads the world in economic growth but that growth is 100% debt-driven. China's recent $10 trillion in growth comes from $10 trillion in additional debt. In total, China has $26 trillion in debt. Debt is a huge systemic risk, but it's not just China.

The instability of China’s credit-fueled, investment-focused growth strategy is—without a doubt—one of the greatest systemic risks facing the global economy according to Hedgeye Financials analyst Jonathan Casteleyn.

“The Chinese system has been propped up by debt-fueled growth,” Casteleyn explains in the video above from The Macro Show. “Eventually this very substantial contributor to GDP could start a banking crisis at some point.”

  • Chinese credit outstanding amounts to CNY 173.5 trillion ($26.2 trillion) as of September 30, 2017 (data released 10/15/2017), which is up CNY +19.1 trillion or +12.4% year over year.
  • Chinese non-performing loans amount to CNY 1,636 billion ($246 billion) as of June 30, 2017, which is up +13.8% year over year.

Systemic Risk Not Just China

China is the leader in global growth, and may be among the riskiest in terms of debt, but it's not just China.

Eurozone Risk

The euro has fundamental flaws and much of the European banking system is insolvent. A quick perusal of Target2 Liabilities shows that as of August (the latest data), Spain owes the creditor countries (primarily Germany) €384.4 billion.

Italy owes it creditors €414.2 billion, and Greece €67.0 billion. Portugal also hit a record this month. It owes its creditors €79.0 billion. The ECB itself owes a record €212.9 billion.

To balance the book, debtors need to pay Germany a collective €852.5 billion, the Netherlands €107.5 billion, and tint Luxembourg €183.5 billion.

USA Risk

US public debt to GDP rose from 62.5% to over 100% in five years. It has since stabilized, but that assumes an 8-year recovery continues for something like forever.

Moreover that debt assessment does not count unfunded liabilities like Social Security and Medicare, state and municipal liabilities, or pension plan liabilities that despite monumental gains are massively underwater.

Debt-based systemic risk is everywhere, not just China.

Mike "Mish" Shedlock

Thanks, I was posting numbers in dollars and euros all day.

Jon Sellers, but doesn't the printing just socialise it by increasing inflation and hitting the poorest that hold few if any inflated assets? There's no free lunch, someone, somewhere foots the bill and becomes poorer.

A currency crisis. There is no printing your way out of danger. It didn't work in Wiemar or Zimbabwe and it isn't working in Venezuela. The U.S. dollar is the worlds reserve currency, but that is not permanent. The G20 changed the rules for depositors in November 2014, which means there is another financial crisis coming.

The reason there is no currency crisis is that there is no place to run. Everyone is printing. Everyone is broke. Nobody wants to throw stones from the porch of their glass houses regardless of how filthy and opaque that glass might be. Past currency crisis's have occurred because there were better alternatives, places to run. The success of modern economics is the universal worldwide and simultaneous debasement. Those who have not are instead demonized as a military or otherwise threat. Our perception of liberty is based upon the notion of choice, and while that perception still exists, what we fail to recognize is that those choices are deliberately very limited. The result is that there are no good choices, no principled choices, that could actually render positive long term results. We are enslaved by our own perceptions, our acceptance of choice that really isn't.

No place to run? Really?

I can think of dozen places to "run" in a currency crisis.

You are going to have to do better than that.

@caradoc

No, no, no... You see you aren't thinking clearly. Inflation is just a rise in prices - it has nothing to do with the supply of money. And it's measured by the prices of things we want to look at - so we can simply look at the prices of things that aren't rising. That means there is no inflation. See?

Print all you want! It doesn't matter!

I shouldn't need a tag, but here it is: /s

One small issue of China wanting to dethrone the dollar. It is China that has pegged their currency to the dollar. If free market forces were to be allowed given they have the trade surplus and we have the trade deficit then the dollar should fall in value. The problem with that is they own a huge amount of American debt that is all based is dollars. This would led to massive currency loss that would harm their banking system. The truth is they are in a catch 22 situation and cant get out.

@caradoc, Depends. The federal government always prints money but always absorbs 100% of it back through taxes and issuing treasury bonds. The federal reserve prints dollars but they only show up as excess reserves in banks accounts with the federal reserve. Inflation can happen if the federal government spends too much money in an already full employment situation. Wages will be driven up forcing employers to raise prices. But it is highly unlikely that you would have full employment and a systemic crisis in the financial system at the same time.

@JonSellers. QE works slightly differently in different places but it should be obvious that if the government is using printed money to pay its bills then then that printed money (by definition) is circulating in the economy/financial system. The idea that it all remains 'trapped' in reserves is nonsense -- albeit I concede it's a belief that is widely held.

... what you are suggesting is that China can freely print all the money it wants without consequences. This too, must be false, by dint of logic, if nothing else. In fact, any other 2-bit banana republic, in charge of its own currency should be able to do the same, but as we've seen, time after time, that ends in tears.

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