China’s crackdown on grey rhinos won’t reduce its debt burden, it will only redistribute it

China is putting grey rhinos – business empires that inflate through debt-fuelled asset acquisitions – on a financial diet. Unfortunately, most of China’s grey rhinos are really Ponzi schemes that live on more and more debt. Dieting is a kind of death sentence. Unless the government is privately backing off from its public stance, many carcasses will soon float up to the surface of China’s debt ocean.

The crackdown on the grey rhinos stems from the authorities’ belief that a financial crisis is sparked by a Lehman Brothers or a Bernie Madoff. If the government can take them out first, a crisis could be avoided.

This is different from the generally accepted belief that a crisis happens because the system has gone wrong. In this line of thinking, where and who started the crisis is not important. The right question to ask, in China’s context, is why there are so many grey rhinos.

The answer will determine whether China can wean itself off its debt addiction. The elephant in the room is really China’s annual monetary and credit growth targets that consistently exceed the nominal GDP growth rate. The debt bubble is a consequence of this policy.

Can Xi Jinping head off the grey rhinos in China’s economy?