The macro-economic landscape has profoundly changed since the financial crisis. Developed markets deleveraged, and emerging markets became the engine of global credit and money growth. The top-left chart from the BIS shows this very clearly. EMEs (emerging market economies) have seen their non-financial credit-to-GDP rise by almost 60 percentage points since 2006, while advanced economies have seen theirs flatline. We can also see in the top-right chart much of this credit growth in EMEs has fuelled property price rises, while AEs’ property has sagged.

As always, China is a pivotal player. Much of the credit growth has been there. Strikingly, 60% of global M1 growth since 2008 has come from China – without China, global M1 would have only grown 20% in the last 9 years (bottom-left chart). While this growth in EM credit was welcome in the aftermath of the crisis, it is arguably now a destabilizing force for the global economy. Half of the countries with the 15 highest Variant Perception Debt Crisis Scores (bottom-right chart) are EMs, the top one being China. This is why it is essential to scrutinize China’s latest attempt to tighten monetary policy. If it gets it wrong, the fallout could spread way past China’s borders. Decoupling is a fantasy.

(Please click on image to enlarge.)

Charts about global credit growth (Private non-financial credit to GDP, real property prices, debt crisis aggregate score, and Global M1 and Global ex-China)

Source: Bloomberg, Macrobond, BIS and Variant Perception