The dangers of China's push for more debt-fuelled growth

China's once red-hot property market is crumbling and its previously free-lending banks are saddled with mounting bad loans. Beijing is worried, but what solution can policymakers find, given the alarming increase in government and corporate debt and loss of competitiveness over the past six years?

Surprise, surprise - Beijing has set its eyes on debt-fuelled growth again, this time boosting lending to households. China's total debt is not excessive, so Beijing can try this trick. But its efforts will end in tears without genuine redistribution of income towards consumers.

Some people argue China already has too much debt and has little scope to raise it further. True, total debt has surged since the global financial crisis, but it is not extreme, as in some other countries. Gross private non-financial debt and gross government debt added up to 2.4 times China's gross domestic product last year compared with close to four times for Japan and Portugal and more than three times for Greece and Spain.

Yet there is no magic number above which debt in an economy becomes excessive. Moreover, different economic structures, cultural habits and market perceptions lead to different levels of sustainability for household, company and government debt.

Even so, a global comparison suggests Beijing can continue to play the debt game a bit longer. Also, like Japan, most of the debt is owned domestically so China would not be under the same international pressure as Greece and Argentina.

China responded to the financial crisis with a massive credit-fuelled stimulus. Banks were instructed to lend and they obliged by boosting corporate loans, their business mainstay. Household borrowing also rose, but at less than half the speed; as a share of GDP, it remains well below developed-nation levels.