Asian overall debt increased in 2013

At 208% of GDP, Asian overall debt reached a record high in 2013, compared to 192% the previous year. Indebtedness increased across the whole continent at a slightly faster rate in 2013 than 2012, while GDP (gross domestic product) growth slowed down, according to an HSBC News & Insight report, written by Frederic Neumann, Co-Head of Asian Economic Research at HSBC.

Eventually, the region is going to have to “wean itself off its addiction to debt,” Neumann writes.

When credit grows faster than GDP expansion, then credit intensity, which measures how much additional borrowing is needed to generate extra GDP, is increasing.

Expanding credit intensity may mean an economy is losing efficiency and depending on debt to keep GDP growing. Should the financial system get stuck the whole thing can fall flat on its face.

Since 2008, debt has increased by 50 percentage points in Asia. “Even excluding China,” Neumann writes “the ratio climbed from 172% to 180% last year.”

Rapidly-growing debt

Debt has grown very fast in Thailand, South Korea, Hong Kong, Japan, Malaysia, China and Singapore. In Indonesia, the Philippines and India, however, aggregate leverage has remained pretty much the same, with government debt as a share of GDP declining while private-sector debts expanded.

In India, Malaysia and Japan, government debt is relatively high, while household debt ratios have increased rapidly in Thailand, Malaysia and Singapore. Household debt ratios have also risen steeply in China, but from low levels.

A person’s or company’s debt ratio tells us what percentage of total assets consist of debts. The formula is Total Debt ÷ Total Assets.

Different types of debts have risen throughout the region:

  • China has had the second steepest increase in debt-to-GDP ratio since 2008.
  • Japan’s government debt has risen sharply.
  • Malaysia has seen household and government debts grow rapidly.
  • In Singapore and Hong Kong, bank lending to corporates has risen rapidly.
  • In South Korea there has been a sharp rise in corporate bonds.
  • Thailand has seen a significant increase in household debt.

In the Philippines, India and Indonesia, however, the rise in private-sector indebtedness has been about the same as the decline in government debt-to-GDP ratios.

Shadow banking

Forty percent of the rise in total debt in China since the financial crisis has come from shadow bank lending. Newmann writes “China’s non-bank lending is not much larger than what might be expected of an economy at its level of development.”

Shadow banking refers to banking-like activities carried out by non-banks – financial institutions that are not regulated.

Shadow bank lending in other economies in the region is also growing.

So far, Asia’s rising debt has been fairly easy to finance. Interest rates are extremely low, inflation is relatively low, banks are full of cash, and the majority of the economies in the region save in aggregate more than they invest.

Neumann points out that over time economic growth cannot be sustained by expanding credit alone. Productivity growth needs to pick up. “We need reforms, reforms, reforms,” he writes.

China urges banks to lend more

The People’s Bank of China has called on the country’s biggest lenders to accelerate the granting of mortgages as developers throughout the country cut prices to attract homebuyers.

Reforms are needed - Asian overall debt
Growth cannot be sustained just by borrowing.

There is growing concern among investors regarding the Chinese housing slowdown as April saw a falling number of cities reporting increased new house prices.

Asia’s five challenges

The IMF says that Asia faces five challenges:

  • Overcoming the middle-income trap.
  • Promoting financial development.
  • Improving its institutions and governance.
  • Coping with an aging population.
  • Halting rising inequality.