Goldman Finds That China's Debt Is Far Greater Than Anyone Thought

When it comes to China's new credit creation, at least the country is not shy about exposing how much it is. To find the credit tsunami flooding China at any given moment, one just has to look up the latest monthly Total Social Financing number which include both new bank loans as well as some shadow banking loans. As we reported in April this amount had soared to a record $1 trillion for the first quarter ...

... although as we followed up last month, it tumbled in April as suddenly Beijing slammed the brakes on uncontrolled credit expansion. It is unclear why, although the following chart may have had something to do with it: increasingly less of credit created is making its way into the broader economy.

No matter the reason for these sharp swings in credit creation, one thing that was taken for granted by all is that unlike China's GDP, or most of its "hard" macroeconomic data, at least its credit creation metrics were somewhat reliable, and as such provided the best glimpse into Chinese economic inflection points.

That appears to no longer be the case.

In an analysis conducted by Goldman's MK Tang, the strategist notes that a frequent inquiry from investors in recent months is how much credit has actually been extended to Chinese households and corporates. He explains that this arises from debates about the accuracy of the commonly used credit data (i.e., total social financing (TSF)) in light of an apparent rise in financial institutions’ (FI) shadow lending activity (as well as due to the ongoing municipal bond swap program).

Tang adds that while it is clear that banks’ investment assets and claims on other FIs have surged, it is unclear how much of that reflects opaque loans, and also how much such loans and off-balance sheet credit are not included in TSF. By the very nature of shadow lending, it is almost impossible to reach a conclusion on these issues based on FIs’ asset information.

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