Wolf Richter at wolfstreet.com with the latest on the impending Chinese debt crisis:
China’s debt boom, or “credit boom” in more palatable terms – whose true extent remains purposefully obscure – and what it might do to the Chinese economy and by extension to the global economy is starting to worry some folks at the New York Fed. This is how their article starts out:
Debt in China has increased dramatically in recent years, accounting for roughly one-half of all new credit created globally since 2005. The country’s share of total global credit is nearly 25 percent, up from 5 percent ten years ago. By some measures (as documented below), China’s credit boom has reached the point where countries typically encounter financial stress, which could spill over to international markets given the size of the Chinese economy.
The data points can give you the willies:
• Nonfinancial debt in China has soared sevenfold in a little over a decade, from about $3 trillion at the end of 2005 to nearly $22 trillion.
• Banking assets (mostly loans) have soared sixfold during the same period to over 300% of GDP.
• In 2016 alone, credit outstanding jumped by over $3 trillion; the pace of growth was about twice that of nominal GDP.
The international experience suggests that such a rapid buildup is often followed by stress in domestic banking systems. Roughly one-third of boom cases end up in financial crises and another third precede extended periods of below-trend economic growth.
The surge in nonfinancial sector debt kicked off with corporate borrowing, mostly in the infrastructure and property sectors. More recently, household debt began to surge, mostly mortgages; again the property sector.
Lending by banks is still the largest component of the credit boom, but as authorities are trying to keep it from spiraling out of control, “shadow” lending by nonbanks (trust loans, entrusted lending, and undiscounted bankers’ acceptances) has surged:
Nonbanks, often in cooperation with banks, have found ways around authorities’ efforts to restrict lending to certain sectors (such as real estate and industries with excess capacity like steel and cement) following the initial surge in credit in 2009.
To continue reading: Debt Boom in China Could Lead to “Financial Crisis,” But Maybe Not Yet: New York Fed