The Bank for International Settlements has become the latest global institution to warn that China’s rapidly expanding debt burden is setting the stage for a financial crisis. The total size of the country’s debt pile is not extraordinary in itself — the BIS estimates it is still smaller as a percentage of gross domestic product than in places such as the UK, Japan and the euro area. But the speed with which China has accumulated this debt is a serious worry, not just for Beijing but for the entire world, given China’s role in recent years as a driver of global economic growth.
At the end of 2008, total debt in China was 147 per cent of GDP and less than 1.5 units of credit were needed to generate one additional unit of GDP. As at March this year, China’s total debt was equal to more than 255 per cent of GDP and takes more than three units of new credit to generate an additional unit of GDP, according to the International Monetary Fund.
Virtually every other economy in history that has seen that rapid an increase has subsequently experienced a financial crisis. Optimists in China and beyond counter that the state owns all of the lenders and many of the borrowers, and the country’s external debt is still very low. Therefore, they argue, it is unlikely to experience a “Minsky moment” or forced deleveraging and a collapse in asset prices.