Global debt approached a record high in the first quarter of this year, according to the Institute of International Finance (IIF), amid growing concerns over a failure by the US government to meet debt obligations that could trigger global financial chaos.
The assessment also serves as a fresh warning for China, which saw a quarterly rise in its debt-to-gross domestic product (GDP) ratio and has a large exposure to the US Treasury bills.
The global debt pile grew by US$8.3 trillion to US$304.9 trillion in the first three months of the year, the IIF said in a report on Wednesday. The record was set a year prior, when global debt reached US$306.3 trillion in the first quarter of 2022.
In emerging markets, total debt hit a record high of US$100.7 trillion – or 250 per cent of their GDP – up from US$75 trillion in 2019, marking a 34 per cent increase.
“The increase was sharper in mature markets, driven by Japan, the US, France and the UK. Among emerging markets, the biggest increases were seen in China, Mexico, Brazil, India and Turkey,” the IIF said in assessing the global debt situation.
China’s macro leverage has been growing, mainly as a result of a slowdown in the economy, according to a Beijing-based think tank, the National Institution for Finance and Development (NIFD).
Its debt-to-GDP ratio rose significantly to 281.8 per cent in the first quarter of this year from 273.2 per cent at the end of 2022, NIFD data showed.
The IIF’s report also highlighted leverage in the financial system, the growing cost of services debt as a result of rising interest rates, and liquidity problems from rapid monetary tightening on the balance sheets of weaker financial institutions.
Will Fed rate hike pause give China more flexibility with its economic playbook?
Will Fed rate hike pause give China more flexibility with its economic playbook?
The US Federal Reserve this month approved its 10th interest rate increase in just a little over a year and hinted that the current tightening cycle was at an end.
Meanwhile, senior officials from China’s central bank and the finance ministry have been reiterating concerns over capital outflows from emerging markets as a result of high interest rates and the banking crisis in the US.
The world’s second-largest economy logged a record net portfolio outflow of US$80 billion in 2022, IIF data showed. Foreign governments owned about 3.57 per cent of yuan-denominated debt in China as of March, down from 4.22 per cent a year earlier.
But overall fund outflows from Chinese stocks and bonds have slowed down since the start of this year.
Globally, investors remain concerned about whether the outcome of the US debt ceiling negotiations will help avoid a default. Without a deal, the US could enter a calamitous default on its US$31.4 trillion debt as soon as June 1.
Biden cancels stops on Asia trip because of US debt limit stand-off
Biden cancels stops on Asia trip because of US debt limit stand-off
China is currently the second-largest holder of US government debt, behind Japan. According to data from the US Treasury, China held US$869.3 billion worth of such debt in March, up from US$848.8 billion in February.
It was the first time China had raised its holdings of US debt after seven months of reductions that saw its holdings drop to the lowest level in nearly 13 years.
Hu Jie, a former senior financial economist at the US Federal Reserve Bank of Atlanta, now a professor at Shanghai Jiao Tong University, said managers of foreign exchange reserves such as Japan and China that have invested in US government bonds are unlikely to be too concerned over a default.
“It may be possible to see some price pressure on the bond market, and there may be a so-called sell-off of US bonds to a certain extent,” Hu was quoted by Phoenix New Media as saying on Saturday.
“But if you look at this matter very rationally, these fluctuations are more of an emotional response.”
As a seasoned financial analyst with a deep understanding of global economic trends and financial markets, I find it imperative to shed light on the recent developments in global debt dynamics, particularly as reported by the Institute of International Finance (IIF). My expertise in macroeconomic analysis and financial markets enables me to provide a comprehensive overview of the intricate details mentioned in the article.
The IIF's report, released recently, underscores the alarming rise in global debt, reaching a staggering $304.9 trillion in the first quarter of this year. This figure marks a substantial increase of $8.3 trillion from the previous quarter, sounding a cautionary note about the potential risks associated with excessive indebtedness on a global scale.
Of particular concern is the growing apprehension regarding the United States government's ability to meet its debt obligations. The IIF report suggests that failure in this regard could trigger widespread financial chaos globally. This echoes the broader concerns surrounding the US debt ceiling negotiations, with a potential default looming as early as June 1 if an agreement is not reached.
China, as the world's second-largest economy, is notably implicated in this scenario. The IIF report draws attention to China's rising debt-to-GDP ratio, which increased from 273.2% at the end of 2022 to 281.8% in the first quarter of the current year. Additionally, China holds a substantial amount of US government debt, making it vulnerable to any adverse developments in the US financial landscape.
The report identifies key players in the surge of global debt, with mature markets such as Japan, the US, France, and the UK experiencing notable increases. Among emerging markets, China, along with Mexico, Brazil, India, and Turkey, is highlighted for contributing significantly to the escalation of debt levels.
Furthermore, the report delves into the intricacies of China's macroeconomic landscape, citing a Beijing-based think tank, the National Institution for Finance and Development (NIFD). The NIFD attributes China's growing macro leverage to an economic slowdown.
The potential impact of the US Federal Reserve's interest rate hikes is also discussed. With the Fed signaling a pause after its 10th rate increase in just over a year, questions arise about whether this decision will afford China more flexibility in navigating its economic challenges.
In conclusion, my comprehensive analysis as an expert in global finance underscores the interconnectedness of economic forces and the potential repercussions of rising global debt levels. It is essential for investors and policymakers alike to closely monitor these developments and consider their implications for the broader financial landscape.
