20180607-NATIXIS-What_is_fuelling_debt_in_China_and_in_emerging_countries_other_than_China__6页_689kb

Flash Economics Summary

Core Content

This document analyzes the factors driving debt growth in China and other emerging countries since the 2008-2009 financial crisis. It highlights how both China's financial repression policy and the increasing size of global finance have contributed to the rise in debt levels and financial instability.

Main Points

1. Global Debt Increase Driven by Emerging Markets

• Since the 2008-2009 crisis, China and other emerging countries have been the main contributors to the global rise in debt ratios.
• Chart 1A and 1B illustrate that the total global debt ratio has increased significantly, with China and other emerging countries at the forefront.

2. China's Financial Repression and Debt Growth

• Financial Repression Policy: China has maintained capital controls (except 2014–2016), which have kept interest rates abnormally low.
• Low Interest Rates: These have resulted in a low cost of capital, leading to high levels of investment, especially in construction.
• Debt and Misallocation of Savings: The low interest rates have caused an inefficient allocation of savings, financing low-productivity investments.
• Financial Risk: The rapid rise in debt and investment levels poses a financial risk due to the potential for instability and reduced returns.

3. Emerging Countries (Other than China) and International Capital Flows

• The growing size of global finance has led to increased international capital flows, particularly to emerging markets.
• These flows have driven down interest rates, increased liquidity and credit expansion, and contributed to a sharp rise in debt levels.
• When capital flows reverse, interest rates rise, liquidity contracts, and credit slows, leading to economic instability.

4. Financial Instability and Risk of Crisis

• China: Financial repression leads to low interest rates, high debt, and misallocation of savings, increasing the risk of financial instability.
• Other Emerging Countries: The large and volatile nature of international capital flows, driven by the size of global finance, destabilizes these economies.

Key Information

• Chart 2A and 2B illustrate the relationship between interest rates and capital flows in China.
• Chart 3A and 3B show the composition of China's investment, with a notable focus on construction.
• Chart 4A and 4B highlight the growth in global finance, including M2 money supply, market capitalization, and monetary base.
• Chart 5A and 5B reflect the magnitude of capital flows and equity/bond purchases in emerging countries excluding China.
• Chart 6A, 6B, and 6C demonstrate how capital inflows and outflows affect interest rates, liquidity, and credit in emerging markets.

Conclusion

The document concludes that both China's financial repression and the expansion of global finance have led to a loss of control over the "size of finance" in emerging markets. This has resulted in two distinct but related forms of financial instability: in China, through misallocation of savings and excessive debt; in other emerging countries, through the volatility and scale of international capital flows.

Disclaimer

• This document is intended for professional and qualified investors only.
• It is confidential and cannot be shared without prior consent.
• It does not constitute a financial analysis or personalized investment recommendation.
• Natixis and its affiliates are not liable for any actions based on this document.
• The document is not a solicitation or offer to buy or sell any financial instruments.
• The information is based on public data and does not take into account individual circumstances.
• Views expressed are the personal opinions of the authors and may differ.
• The document is subject to legal restrictions in various jurisdictions.