There is some concern that China is in a credit bubble. Since the financial crisis, debt owed by Chinese individuals, corporations and governments has increased dramatically. Earlier this year, Fitch downgraded ratings of China’s sovereign debt. China’s debt-to-GDP ratio of almost 200% is now higher than the 176% figure Japan reached in 1990 before the country’s “lost decade”.
Will Beijing be able to manage slowing economic growth and prevent a hard landing? The answer may (in part) lie in recently released data.
After four straight months of declining credit growth, China, on September 9th, reported a doubling of new credit in August. Industrial output also jumped, growing 10.4% over the prior year. Whether or not the growth in credit and output is correlated, liquidity in China is much more available now than a month ago when China’s “government-engineered cash squeeze” persisted (Bloomberg). This credit growth was very beneficial for private corporations using the Chinese shadow banking system, (assets ~20.5 trillion yuan), for liquidity needs.
According to Bloomberg, the shadow banking system provided 55% of new yuan loans in August compared with a measly 13% of loans in July. This is an enormous difference and leads to significant questions concerning systemic risk. Since the shadow banking system is hardly regulated, does this put financial stability in jeopardy? All credit growth only adds downside potential. Could this spike in credit growth be the straw that breaks the camels back, bursts the bubble, and causes a hard landing?