Of the many reasons why Asia (outside of Japan) weathered the Great Recession more ably than other parts of the world, one of the most important was the fact that the region never experienced a financial crisis. The banks of Asia generally avoided indulging in the toxic subprime securities that tanked some of Wall Street’s most famous institutions. Part of the reason was they could earn real returns in their core business — lending to expanding companies in their high-growth home economies. The banks had also learned a lesson — a painful lesson — from the 1997 Asian financial crisis about the dangers of risky lending and unsustainable debt, and had become more conservative than they had been in the past. Government officials in Asia, as well, tend to take an old-fashioned attitude on budget spending and borrowing (again, outside of Japan), and they, unlike their counterparts in Europe, were able to stimulate their economies without undercutting their solvency.
Now, however, analysts in Asia are ringing alarm bells that debt in the region is rising at a worrying pace. A recent study from megabank HSBC noted that, based on the ratios of bank credit to GDP for the region, “leverage is now higher than at the peak before the Asian crisis in 1997.” Adding in record bond issuance in recent years, a financing option not common in 1990s, “overall leverage is even higher today than implied by traditional measures of bank lending,” the report explained. In some countries, debt is rising at a disturbing rate. According to data from Standard & Poor’s, lending from financial institutions to the corporate and household sector as a percentage of GDP in Hong Kong jumped from 143% in 2005 to an estimated 202% in 2012. In South Korea, the same ratio surged from 132% to 166% over that same time period; in Singapore, 91% to 117%; and in China from 112% to 130%. Vietnam’s ratio nearly doubled from 66% to 113%. The culprits differ from economy to economy. In Vietnam, state-owned enterprises are to blame. In South Korea, it’s households.
The debt has been rising in some respects for perfectly rational reasons. Lending and borrowing have been encouraged by superlow interest rates just about everywhere. And rising debt levels are a natural outgrowth of rising wealth. As economies advance, financial sectors become more advanced and debt tends to increase.
Nevertheless, there are reasons to be concerned about what’s going on in Asia. HSBC noted that Asian economies are requiring more debt to keep going, a sign that Asia is not as economically healthy as its GDP growth rates suggest. “With economic growth still highly credit-dependent, more and more debt is needed to generate one percentage point of GDP growth,” the HSBC report said. “Fundamentally, this is a worrying trend.” Furthermore, analysts worry that debt in Asia is set to keep rising because of the incredibly easy money conditions in the entire global economy. “Debt has the possibility to rise even further,” S&P senior director Tan Kim Eng in Singapore told me. “Financial institutions are under pressure to lend money. At a macro level you have to worry about the leverage building up.”
How nervous should we be? For now, Asian debt doesn’t seem particularly dangerous. Debt levels in Asia are still generally lower than in Europe. But rapidly escalating debt does leave economies more vulnerable to shocks and sudden shifts. If growth were to slow down in the region for a period of time, or if the permissive monetary conditions tighten meaningfully, the rising debt in Asia could become a serious problem. “I’m not yet worried, but wary,” says Tan. “In some countries the debt level has gone up quickly in a short period of time.” Here’s how Tan explained the situation in a recent report:
“Debt levels in key economies are much higher today than they were just six to seven years ago. Betting that they can avoid the law of gravity to stay safely at these elevated levels indefinitely doesn’t seem wise … The unusually easy global monetary conditions today may be magnifying financial and economic risks. And the conditions that supported robust economic growth in the region could turn less supportive in the future. In the current circumstances, a lack of regulatory vigilance could create possible financial instability.”
As any Kansas housewife or Greek civil servant can tell you these days, taking on too much debt in too short a period of time can be lethal to your future economic prospects. Asia has suffered from poor lending practices and unsustainable debt levels in the past. For the good of the global economy, let’s hope the bankers, consumers and corporate executives of the region haven’t forgotten that fact.