China’s Debt-Fueled Growth

The Bank of International Settlement (BIS) issued a dire warning earlier this year, opining that a full-blown Chinese banking crisis could be lurking on the horizon. In its September quarterly report, the BIS said that China’s credit to GDP ratio- which measures bank lending against the size of a country’s economy- had reached 30.1, the country’s highest to date. In the context of sluggish economic growth, the risk of individuals and corporations defaulting on their loans rises, increasing the risk of a banking crisis.

China’s soaring debt levels have been the subject of much concern and speculation. Outstanding loans have reached $28 trillion, as much as the commercial banking loans of Japan and the US combined. Total Chinese debt rose to 255% of GDP at the end of 2015, marking a 107% increase over eight years, and currently stands above 260%. Corporate debt alone is 171% of GDP. Worryingly, these figures do not account for the billions in Chinese shadow banking activity occurring outside of the formal banking sector.

According to Ambrose Evans-Pritchard of the Telegraph, these debt levels are “enough to threaten a worldwide shock if China ever loses control”, making China a global epicenter of risk.

Though economists and regulators have entreated China to ramp down its debt, China has relied on this debt to fuel and sustain its economic growth, which has slowed down significantly. In just the 12 months leading up to September 2016, China took on more credit than it did in 2009, when it implemented a great bout of stimulus spending in response to the recession. Property transactions and car sales in China have also ballooned.

The Chinese government is undoubtedly aware of the risk and has sounded warnings about the ballooning national debt through state mouthpieces such as the People’s Daily. However, it has yet to take any concrete action and is perhaps unwilling to deal with the political costs of slowing growth and laying off workers in order to rein in its debt. China’s bank system is also largely state-controlled, meaning they would likely be bailed out in the event of a crisis.

References:

http://www.bbc.com/news/business-37404838

http://www.telegraph.co.uk/business/2016/09/18/bis-flashes-red-alert-for-a-banking-crisis-in-china/

http://www.wsj.com/articles/chinese-debt-soars-into-space-1473755429

http://www.bbc.com/news/business-37114643

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