Beijing's massive stimulus response to the global financial crisis might have halted decline and revived growth. But the economy is now facing the consequences of a credit bubble it has helped to create, and that has everyone spooked. Debt owed by local governments, corporations and individual households is mounting. In 2008, total debt was around 130 per cent of gross domestic product. Today, it has ballooned to almost 200 per cent, or about 100 trillion yuan (HK$125 trillion). That's a threshold Japan crossed only a few years before its economy crashed in 1989. Citing the danger of a rapid expansion of credit within the economy, Fitch Ratings cut China's sovereign rating earlier this year, a first since 1999. Experts worry not only about the bad loans with the major banks, estimated at around 3 trillion yuan, but also the rapidly expanding "shadow" lending system, the size of which is anyone's guess. Since 2008, local officials across the country have been told to stimulate growth. Many follow the same script. They buy farmland on the cheap, then sell to developers at marked-up prices or use it as collateral for loans. But since they are barred by law from incurring debt by borrowing or issuing bonds, they set up financing vehicles to take on debts. And such debts are reaching massive and alarming proportions. With corporations, especially state-owned enterprises, the massive liquidity made borrowing easy. Many have developed a debt dependency while failing to invest wisely. By contrast, smaller private companies have little access to funding from the big state banks and have resorted to borrowing in the shadow banking system, paying much higher interest. This, in turn, has fuelled the rapid expansion of this lightly regulated sector. Meanwhile, the fabled ability of Chinese to save is changing. Younger people have no qualms about borrowing as more adopt the habits of Western consumers. Within limits, this can be a good thing. There is no question that people need to save less and spend more if the economy is to switch from its reliance on exports to greater consumption. But the transition will be long and difficult. Improved social safety nets are needed; powerful vested interests which surround the state-owned enterprises that dominate the economy have to be reined in. Beijing knows it must deflate the credit bubble. The question is whether it executes this without derailing the economy - or, more likely, lets the problem fester.