Willem Buiter is the highly respected Chief Economist at Citigroup, and when he speaks, people tend to listen. Last week, in an interview with the ABC, Buiter sounded a strong warning about China’s debt bubble, and the ramifications for Australia.
Here are a few of the points he made:
1. No country has ever had a debt problem, both the level of debt to GDP and the increase (in debt) since 2008 – and an excess capacity problem of the magnitude that China has – and has been able to work its way out with debt restructuring and excess capacity elimination without at least a cyclical downturn.
2. Sometime in 2018 we could see an attempt at more aggressive debt restructuring and capacity elimination (in China). Expect a stronger cyclical downturn in the second half of 2018/2019.
3. Of all the advanced economies, Australia is most dependent on China. A stronger cyclical downturn in China would hurt Australia. Authorities must be willing to let the (Australian dollar) exchange rate go.
4. Australia will need a long list at the Federal, State and local level of shovel-ready infrastructure projects where all the environmental impact assessments have been done, all the NIMBY issues have been settled and which are only waiting for a “Yes” and the money; and that, apparently, has not been achieved.
5. Australian household debt at a record high is a serious concern. At the end of a housing bubble and a major construction boom, house prices are likely to fall rather than rise from here. The price of excessive leverage is painful deleveraging. Buiter says he has never seen a household bubble and a household leverage boom like the one in Australia, and indeed Canada, that did not end in a bust.
And here are some tables, care of Deutsche Bank and the Bank of International Settlement, which may give some context. China’s debt to GDP ratio is expected to exceed 300 per cent in the next few years.
With debt levels, it is often the rate of change that matters, and China is a standout in the change in debt/GDP over the past five years with an 80 per cent increase.