Credit Growth and China’s Debt


                                                                                                                                        15/4/2014

Chinese economy which has been growing rapidly in the last two decades is in for a major shift. Chinese economy which grew 10 percent in 2012 has slowed down to a growth rate of 7 percent in 2013. This is still high but not quite as high. First, their exports which was around 8.3% of 2007 GDP has crashed to 2.6 percent of 2011 GDP. However during the same period the rate of investment rose from 42 percent to 48 percent.

What then seems to be the problem? Chinese investment which has been soaring over the years has come to a halt as the expected returns from these investment has been falling steadily. The growth was achieved primarily from borrowing and this is not happening now. A study made by the IMF shows that China has been over investing by 12 to 20 percent of GDP.

The rate of growth of credit in China has been at an astonishing level compared to their GDP growth. The question now is not whether the credit growth will stop but how and when the accumulation of debt is likely to end as growth peters out. The longer the credit growth goes on the greater the risk of a nasty surprise down the road.

How did this credit grow? According to the IMF low interest for household savers helped subsidize investment to the tune of 4 percent of GDP of a year. Because of the growth there has been an explosion in credit and debt. Social financing as the Chinese call it has reached 200 percent of GDP up from 125 percent in the 2007.

Finally, the present explosion of credit growth has left the Chinese government with an apparent dilemma either to let the debt accumulation continue creating bigger problems in the future or implement rapid reform and risk a fall in investment and a bigger unplanned slow down. We will wait and watch.

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One Response to Credit Growth and China’s Debt

  1. sidvenki says:

    Dear Sir,

    Really a good article that follows the China’s debt bubble. My take is that China would continue accumulating debt as it wont risk the slow down of the economy. It will again reach a point where it has to make account for the bad loans which will be in trillions of RMB and would be advocating artificial things like what the Fed Reserve (QE) is doing. Flood the monetary system with money so that they can show GDP numbers, but in reality the unemployment would start showing its ugly face.

    The main mistake the Keynesian economists does is this:
    Whenever the economy slows down, lower the interest rates and keep up the spending through credit. But they fail to understand the real motive: The market is unattractive to the current products & services and general consensus for the need of new products & services. So there will be a lean period where savings increases, and entrepreneurs innovate and provide new services and with real increased savings, there is more spending and the economy gets back on track.

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