Global debt tops US$300 trillion, and emerging markets owe more than ever

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.

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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.

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.

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."

This article originally appeared on the South China Morning Post (SCMP).

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