When will the “sky fall in” on China’s economy and on its financial system? There have been so many warnings in international media that such a catastrophe is imminent that it must surely happen soon. Yet the data and much expert opinion offer little evidence of a coming crash in China.
A
recently published survey of China’s financial system by the International Monetary Fund does not support the idea that China is in a
credit bubble which could pop at any time. The study does provide ground for caution over the massive and rapid build-up of financial assets in China, relative to the size of the economy, and it does point to the need for specific reforms in the system. None of this, however, gives credence to the idea of an imminent bust.
The data appears worrying if viewed in a purely statistical context. Financial assets in China jumped from 270 per cent of gross domestic product in 2010 to about 470 per cent in 2016, with those in the opaque non-banking sector (shadow banks) growing especially fast. Banks’ loan assets and other forms of credit have been growing faster than GDP and the question being raised is whether the size and complexity of China’s financial system has expanded beyond what is needed even in the world’s second largest economy.
There are, however, different ways of viewing this credit overhang. One view is that China’s centrally-imposed target of
doubling the size of national income between 2010 and 2020 has driven excess credit creation. Added to this,
controls on capital outflows from China are seen by some as a factor driving overinvestment in the domestic economy. In this view, the
credit creation “tail” in China has wagged the real economy “dog”, setting the scene for a huge increase in asset values, inflating an unsustainable asset bubble.
Seen in a different light, however, China’s officially encouraged
investment boom – not least in creating nationwide “top of the line” physical
infrastructure – represents an investment in the future that will go on yielding high returns.
Some argue that China’s pumping up of credit has left its banks and “
shadow banking” networks vulnerable to a sudden increase in
non-performing loans, or even to collapse. Yet the fact that so much Chinese enterprise (and foreign exchange reserves) is in state hands arguably makes bailouts easier than in fully marketised economies.
