21 October 2016
Hong Kong’s monetary base has expanded faster than that of the US or Japan, driving up housing prices. Photo: Reuters
Hong Kong’s monetary base has expanded faster than that of the US or Japan, driving up housing prices. Photo: Reuters

Credit market bubble expected to burst in two years

I said last week that housing prices in Hong Kong may collapse in 2018 or 2019 as a result of the bursting of the global credit bubble.

Since the 2008 financial crisis, the ratio of credit to GDP in the non-financial sector has hovered at high levels in the United States and the United Kingdom, which means these nations have not done substantial deleveraging.

The ratio in China, Japan, the European Union and even Hong Kong has also risen during the period, in a sign that these economies have relied on rapid credit expansion to boost growth.

Currently, the ratio of credit to GDP in the non-financial sector is already close to the level during the financial crisis in the US, China’s ratio has even surpassed that of the US, and Japan posted a record-high ratio. Indeed, the credit bubble is building up.

Hong Kong’s ratio is even higher than that of the US, mainland China or the EU.

Japan’s monetary base has already exceeded that of US after years of aggressive monetary easing.

And Hong Kong’s monetary base has expanded even faster than that of the US or Japan since mid-2008. That has driven up asset prices, including housing prices, in Hong Kong since 2009.

There are obvious signs of a credit bubble in the bond market. The yields of treasury bills and corporate bonds in major developed economies have tumbled to record-low levels.

A considerable amount of bonds now have negative yields, and even yields of junk bonds have dropped to record low levels.

That shows that the global debt market is extremely crowded right now due to massive capital inflows.

The yield curves of Japan and Germany show that their 10-year government bonds both have zero or negative yields. In Switzerland, 40-year treasury bills also have zero or negative yields.

Over the last eight years major central banks have kept pumping money into the financial system, creating bubbles in the credit and bond markets.

It’s worrying that credit and bond bubbles are close to bursting.

The International Monetary Fund has cut projections for global economic growth rates for this year and 2017.

Major central banks are set to expand their monetary stimulus measures, which would further inflate bubbles in the credit and bond markets.

Also, debt yields have been suppressed too much.

As of June 27, of the US$44 trillion bonds in the GFIM Index, US$11.7 trillion of dollar bonds or over a quarter have negative yields, according to credit rating agency Fitch.

The percentage is likely to rise further if central banks expand monetary stimulus programs. If so, more bonds will see extremely low yields.

Moreover, buying sprees by central banks are reducing the availability of government debt for other buyers.

Currently, central banks have cornered 25 to 40 percent of government bonds. The Bank of Japan even holds up to 55 percent of all equity ETFs in the country.

It has become like a Ponzi scheme as central banks have distorted the debt market and squeezed market liquidity.

Companies have actively issued bonds or raised debt over the last eight years in light of low costs.

However, they are now struggling to repay debt as economic growth runs out of steam.

Default cases are on the rise. As of July 19, a total of 541 defaults have been reported since the start of the year.

It is estimated that there will be nearly 1,000 defaults throughout the year, the highest level since the financial crisis.

It is just a matter of time before the bond and credit market bubbles burst.

This article appeared in the Hong Kong Economic Journal on July 21.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist

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