The Global Slowdown Is Making Asia's Debt Mountain Even Worse

PLA screamsREUTERS/Kevin ZhaoPeople’s Liberation Army soldiers perform during a rehearsal of a musical drama titled ‘The Road of Revival’ in 2009.

Morgan Stanley just came out with a fresh chartbook looking through Asia’s debt situation again. It’s safe to say that it’s still looking grim.

While all eyes are on Europe, falling inflation (and the threat of full-blown deflation) are major hazards in Asia, too. When economies grow more slowly, if they can’t slow their debt accumulation down by the same pace, those liabilities get bigger and bigger in comparison to GDP. Paired with rocketing corporate debt, it looks very ugly.

Morgan Stanley’s analysts looked at 10 countries in Asia ex-Japan (AXJ) – Singapore, China, Hong Kong, Korea, Thailand, India, the Philippines, Indonesia, Taiwan and Malaysia.

After a decade of stability, Asia started rapidly accumulating debt after the financial crisis.

The debt pileup has outstripped the world's advanced economies by a mile.

But the strange thing is that Asia isn't actually issuing as much debt as it did before. So what's the problem?

It's because inflation is falling away around the world: Asia's developed economies are no exception.

Four of the 10 big Asian markets outside Japan have inflation of less than 1%.

Low inflation and growth mean Asia's emerging markets can't outgrow their debt as they have in the past.

The liabilities are mostly accumulating in the corporate sector.

China's corporate debt is as large against its economy as the UK's, but the country is much poorer.

And unlike in previous periods, domestic borrowers are driving the surge.

The share of these countries' debts held by foreigners has been declining for a long time.

Here's the US for comparison's sake: Debt as a share of the economy has stalled its growth.

As growth falls, interest rates are rising in Asia, making debt repayments more difficult.

In China, it's even more complicated: The country is now ageing and workforce growth has stopped.

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