Global debt levels may soon explode with China leading the way

Global debt is at elevated levels, but isn’t high enough to draw comparisons with the 2008 financial crisis just yet.

Risky corporate debt, particularly in the form of leveraged loans, has been on the rise for a number of years, with analysts suggesting the recent build up could be a significant risk to global GDP growth.

Since 2015, world private sector debt has risen by around 15 per cent of world GDP - a level higher than it was prior to the global financial crisis, according to Oxford Economics.

Emerging markets have been the main driver of this trend with debt levels in major growing economies such as China increasing rapidly in the past decade.

Growing global debt is a major concern for the world economy because recent evidence has indicated that credit booms often end in busts of seismic proportions. A recent study found that of 175 such credit booms a staggering 70 per cent have ended in busts, a worrying sign for the current debt buildup.

In a sample of large economies, up to 60 per cent of GDP is in economies with “risky” corporate debt and up to 30 per cent of GDP is in economies with risky household debt, according to the Oxford Economics note.

The boom in emerging market debt is coupled with a rise in increasingly risky debt in Europe and the US. Leveraged loan quality is now at its lowest ever level having reached a peak of new deals in the past few years.

Oxford Economics’ research also suggests that the countries at the highest risk are Hong Kong, China, France, Canada, and Chile. China's debt problem is already at a critical stage and a failure to address it could have major implications for the world economy.