George Soros has said that China’s rapid credit growth represents an alarming signal, warning that the Chinese economy “eerily resembles what happened during the financial crisis in the US in 2007 and 2008, which was similarly fuelled by credit growth”.
Now, let us examine the issue: Is the situation really that bad?
According to the Bank for International Settlements (BIS), as of the end of third quarter last year, China’s overall non-financial entities’ credit to GDP ratio was at 248.6 percent, a similar level to the 248 percent in the US presently as well as that seen before the 2008 financial crisis.
There’s no doubt that China’s credit level is at a relatively high mark. But, in terms of absolute value, the ratio of China is not the highest. The figure for Japan is 387 percent, and that of eurozone 269 percent. If a credit crisis were to happen, Japan will encounter it first before China.
The biggest problem in China is not the absolute credit level, but its speed of expansion, especially in the private sector.
As of the third quarter last year, China’s overall non-financial entities’ credit was about 165.7 trillion yuan, representing 2.5 times the level seen in 2008.
The growth is much higher than the 17 percent in Japan, 24 percent in eurozone and 26 percent in the US during the same period.
It was also faster than China’s economic growth in these years. The situation is not healthy and is unsustainable.
The frenzy in mainland stock markets last year, soaring home prices in top tier cities and the latest heat in the commodities futures market are all side effects of the hot money.
However, it’s still too early to say that China will have a credit crisis soon. The government still has huge financial power and is capable of dealing with any chaos in financial markets and the economy.
Authorities can also handle the overheating financial and property markets via administrative methods.
Overall, it’s inappropriate to simply compare the credit situation between China and the US. But with too much liquidity in the market, when there’s a change in government policy, the mainland markets will see increasing volatility.
This article appeared in the Hong Kong Economic Journal on April 26.
Translation by Myssie You
[Chinese version 中文版]
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