Asia’s debt addiction

Debt has become a cause for concern in every one of Asia’s biggest nations: one that has to be addressed before it metastasizes, spilling into the wider region and undermining the global economy. Of greatest concern is, of course, China.

When the klaxons sounded in late 2008, many in the West looked wistfully east, to more economically fertile lands. East Asia, it appeared, was able to suppress debt while maintaining enviously high levels of economic growth. Sovereign and corporate debt across Southeast Asia, which learned its lesson during the 1997 pan-Asian meltdown, was at record modern lows. India was barely touched by the financial crisis; China in 2008 kept growth in the high single digits by unveiling a $586bn fiscal stimulus package.

But scroll forward a few years, and the situation has again reversed itself. Western nations have hardly resolved their addiction to debt, despite a stubborn British and German desire to cling to the tenets of austerity. But broadly speaking, the West has learned to address its mistakes. Budgets were hacked back; banks reined in lending and sweated assets; bail-outs extended by the International Monetary Fund and its friends to Ireland and Portugal were repaid in full.

This time round, it isn’t the West’s turn to binge on cheap debt before attempting to purge at its leisure, but Asia’s. Large portions of the region have been borrowing heavily, from China and Korea to Australia and the Southeast Asian states of Thailand and Malaysia. The backstory and the symptoms may differ but in each case the underlying message is the same. Debt has become a cause for concern in every one of these nation states: one that has to be addressed before it metastasizes, spilling into the wider region and undermining the global economy.

The problem was starkly presented in a February 2015 report by McKinsey Global Institute, titled Debt and (not much) deleveraging. Pointing to a host of problems facing the region, from rising household borrowing to regional concerns about shadow banking, it focused its main beam on Asia’s largest economy. “China’s debt is rising rapidly,” McKinsey said. “Fuelled by real estate and shadow banking, total debt has quadrupled, rising from $7tr in 2007 to $28tr by mid-2014.”