The last time "triangular debt" weighed on economic growth in China the political cycle was more conveniently aligned than now. The then premier, Zhu Rongji, was not constrained by an imminent leadership change from making bold moves to address it. This time the country's leaders are concerned to maintain stability amid the sensitivity and uncertainty of a political transition expected to begin within weeks. But if the situation worsens, it is the obsession with stability that could prompt forceful intervention.
Triangular debt arises when slow sales result in delayed or partial payments and companies end up owing money to each other and to their banks. At the same time, due to contraction in China's main export markets, output exceeds demand and stocks pile up in key industries such as iron and steel, cement and coal, where the rapid build-up of debt has Beijing worried.
The resolution of the triangular debt crisis was one of Zhu's key achievements. He divided state-owned enterprises into profitable, loss-making but salvageable, and hopeless. The profitable were encouraged to take over other firms and the salvageable could apply for debt reduction and restructuring. Unlike in the 1990s, however, when most triangular liabilities were concentrated in state-owned enterprises, they are now to be found in all kinds of companies, which calls for a broader response. An obvious one would be major stimulus measures. But the government has limited these to gradual increases in infrastructure and transport investment and selective easing of curbs on home purchases. This reflects concern about the legacy of bad debt and capital investment of dubious economic value from the massive stimulus programme unleashed in 2009 to combat the global financial crisis.
It all adds up to a big challenge for Zhu's successor, Wen Jiabao, in the last months of his decade in office. Another round of stimulus, even on a much smaller scale, will only delay financial and structural reforms that he champions for an economy overdependent on exports. Because the key to sustainable growth is to boost domestic consumption, the government must not lose sight of these reforms, including liberalisation of the banking sector, so that private capital and enterprise can play a greater role. Meanwhile, the need for stability will prevail one way or another. If unemployment rises amid slowing export and output growth and rising debt, the government can be expected to act forcefully.