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No debt reduction in sight says McKinsey

LONDON/WASHINGTON, DC/SHANGHAI: A report by the McKinsey Global Institute (MGI) says global debt has risen US$57 trillion since 2007 to stand at US$199 trillion – or 286 percent of global GDP.

By mid-2014, developing economies accounted for 47 percent of all global debt growth as governments increased their borrowings by US$6 trillion. However with the exception of China, Malaysia and Thailand, the level averages 121 percent of GDP, compared with 280 percent for advanced economies.

MGI says "it is clear that deleveraging is rare and that solutions are in short supply. Given the scale of debt in the most highly indebted countries, the current solutions for sparking growth or cutting fiscal deficits alone will not be sufficient. New approaches are needed to start deleveraging and to manage and monitor debt."

World debtSince 2007, China's total debt has risen from US$7.4 trillion to US$28.2 trillion by the second quarter of 2014, or from 158 percent of GDP to 282 percent. China's overall debt ratio is now higher in proportion to GDP than that of the U.S., Germany or Canada.

MGI notes China will equal Spain's current level of debt - 400 percent of GDP - by 2018 if it continues at the current rate due the concentration of debt in real estate, the rapid growth and complexity of shadow banking, and the off-balance sheet borrowing by local governments.

The company estimates that nearly half Chinese household, corporation or government debt is directly or indirectly related to real estate - collectively worth as much as US$9 trillion.

Loans by "shadow banking" entities now total US$6.5 trillion and account for 30 percent of China's outstanding debt (excluding the financial sector) and half of new lending. Most of the loans are property-related and are often marketed by banks - creating a false impression they are guaranteed - to wealthy investors promising high returns. MGI warns that the level of risk of China's shadow banking sector "could soon be tested by the slowdown in the property sector".

The report says a third area of concern is the growing off-balance sheet debt issued by Chinese local governments to finance airports, bridges, subways, industrial parks, social housing and other projects. Since 2009, lending to local governments has reached US$2.9 trillion.

MGI concludes saying: "The growing debt of the global economy is an unwelcome development seven years after the financial crisis began. While significant deleveraging may prove elusive for many countries, effectively managing the growth of debt - and reducing it where necessary - is an imperative."

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