Shanghai traders now have more than 1 trillion yuan ($161 billion) of borrowed cash riding on the world’s highest-flying stock market, a nearly fourfold jump from just 12 months ago.  The Shanghai Exchange has surged 86% during that time, more than any of the world’s major stock gauges (chart below).  Margin debt has increased even after regulators suspended three of the nation’s biggest brokers from adding new accounts in January.  Traders have opened over 6.0 million new stock accounts in just the past three weeks! The outstanding balance of the margin debt on China’s two main stock exchanges is at the equivalent of about US$242 billion, over half the level in the U.S. for a market which is less than ¼ the size of the U.S.

Shanghai Composite Index

Borrowing by China’s various levels of government is a big reason the country’s debt load is expanding.  The International Monetary Fund (IMF) says China’s debt is growing more rapidly than debt in Japan, South Korea and the U.S. did before they tumbled into recession.  Local-government borrowing, which totals about $4 trillion by some accounts, is responsible for a quarter of the buildup in China’s overall domestic debt since 2008.  Now, as local governments struggle with plunging land sales, they are increasingly having trouble repaying their debts, which have nearly quadrupled since 2007!  According to McKinsey’s research, total outstanding debt in China increased from $US7.4 trillion in 2007 to $US28.2 trillion in 2014. That figure, expressed as a percentage of GDP, equates to 282% of total output, higher than the likes of other G20 nations such as the US, Canada, Germany, South Korea and Australia.

Debt issues in China were not the only ones worrying officials at the IMF though.  The Fund’s underlying message is that sky-high debt ratios, especially in advanced economies, and old-age populations are a dangerous mix, leaving the world prone to the “Japanese” diseases of deflation and atrophy.  The monetary authorities have little left in their policy arsenal to fight the next downturn, whenever it comes.  The Fund said markets have been lulled into complacency by the lowest bond yields in history and a strange lack of volatility – “an illusion of liquidity” – seemingly based on trust that central banks will always come to the rescue.  Total public and private debt levels have reached a record 275% of GDP in rich countries, and 175% in emerging markets.  Both are up 30 points since the Lehman crisis in 2008, the peak of the Financial Crisis! 

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