The surge in trading on China’s commodity exchanges is the latest example of speculative frenzy in an economy awash with credit. From the rise of shadow banking, to real estate bubbles and August’s stock market crash, regulators have struggled to contain the excesses resulting from Beijing’s habit of supporting growth through debt-fuelled stimulus. The rush into metals markets follows record credit expansion of more than Rmb6tn in the first quarter, engineered by officials to prevent a sharp slowdown in the world’s second-largest economy.
Such episodes are a growing concern for international investors. As China’s role in the global financial system grows, so too does its ability to trigger turbulence in global markets. However, it is easy to criticise Beijing for resorting once again to credit creation to pump up growth. It is less easy to come up with an attractive alternative for policymakers.
The risks of China’s vast debt pile are apparent. A total debt load equivalent to some 240 per cent of gross domestic product — far higher than most emerging markets — is clearly unsustainable in the long term, especially since a significant proportion is held by lossmaking state-owned enterprises in sectors suffering from chronic overcapacity. Even more worrying is the speed at which debt has accumulated — with credit creation accelerating even as economic growth has slowed.