Impending Credit Bubble?

Published on Author sowinski

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”.

workers in a Chinese factory
workers in a Chinese factory

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?


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2 Responses to Impending Credit Bubble?

  1. See the earlier post focusing on real estate – you ought to cross-reference it.

    Are high levels of credit worrisome in a rapidly growing economy? After all, incomes in coastal regions, at least for residents (cf. the Miller book we’ll read later this term), have been doubling every 4 or so year. In addition, if credit is used for productive investment, then the level may seem high, but profits will make it manageable. Finally, if it’s fixed-rate debt, or at least debt at low interest rates that are unlikely to rise, then the potential for problems likewise diminishes. So gather more information!

  2. High levels of credit are worrisome if the Chinese government continues borrowing at the same clip. Also, if the real Chinese economy is growing slower than the awfully smooth GDP growth figures the government reports, there could potentially be problems borrowing more as the country’s interest rates rise and investor appetite diminishes. If the GDP growth is mainly being stimulated through borrowed funds, the spigot of growth will eventually shut off. Even if personal incomes / GDP are rising, a global sovereign debt incident could cause China problems borrowing more especially if the government has cash flow problems for any reason.

    This is an unlikely scenario if global QE persists as so many bonds are being purchased with the additional liquidity.