WILL China be the source of the next global financial disaster? The evidence increasingly offers reason for concern, although the nature of any calamity could be very different from what the world endured in 2008.
At a time when consumers and governments in the US and Europe have been trying – with limited success – to pare down or at least stabilise their debt burdens, China has been doing the opposite. Over the past five years, it has pumped more than $13 trillion (R144 trillion) of credit into its economy in an effort to keep up its growth rate.
The Chinese credit boom has rapidly turned the country into one of the developing world’s most indebted, according to a new report from London’s Centre for Economic Policy Research (CEPR). As of 2013, total private and government debt, excluding that of financial institutions, stood at 217 percent of gross domestic product, up from 147 percent in 2008. That’s more than in any major developing nation except Hungary, though still significantly less than in advanced nations such as the US or Japan.
Such credit-fuelled growth can’t be sustained for long without causing major distortions and setting the country up for a fall. The stimulus is already running into diminishing returns. Over the five years to 2013, government and private debt grew by about 3 yuan for each added yuan of economic activity, a level of credit intensity that the US exceeded only in the years leading up to the 2008 crisis. As in the US, much of the money is going to borrowers with questionable ability to pay, fuelling overbuilding and excess capacity.
The CEPR report notes that almost all the debt is held in China, so the paths of contagion would probably be different from the US subprime crisis, which resulted in direct losses for banks around the world. More likely is a creeping malaise similar to Japan’s lost decades, in which growth stalls. The outlook could change for the worse, though, if the credit boom keeps going at the current pace.
Mark Whitehouse is a Bloomberg columnist