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China has leapt ahead in the indebtedness stakes – the nonfinancial sector now owes the equivalent of over 200% of annual Chinese output – see chart (China’s GDP is $12.5trn, so that is a lot of debt). But also note that “Advanced economies without a crisis” and those “Hit by a crisis” both have nonfinancial debt at close to record levels even when expressed relative to GDP, as do emerging countries.
Source: IMF
With this rise, people are asking if the Chinese economy is taking on so much debt that it is vulnerable to a crash. The chart below gives some food for thought; China’s debt increases are but the latest of a long line of run-ups in debt – the others shown did not end well.
Source: IMF
The IMF team comments: “China faces mounting risks to financial stability as credit continues to rise rapidly. China’s bank assets [mostly loans they have granted] are now more than triple its GDP, and other nonbank financial institutions also have heightened credit exposure.”
Many Chinese financial institutions are very dependent on borrowing from other institutions rather than using customer deposits – this is the sort of thing that led to Northern Rock downfall, along with many other institutions a decade ago. Depositors are much less likely to suddenly refuse to put money in a bank than are flighty wholesale bank lenders.
Chinese banks also have the problem of having to repay their debts over the short run while lending long term. This means they are vulnerable to a refusal by their creditors (usually other financial institutions) to roll-over debt.
Also many of the organisations that have borrowed from the banks may not repay.
The Chinese government is aware that there is too much lending going on, but are caught in a dilemma. If they change course and try to reduce debt levels they could bring on a recession.
Shadow Banking
IMF: “Although regulators in China
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