The coming debt bust in China

The coming debt bust in China, by The Economist. It is a question of when, not if, real trouble will hit in China. China reacted to a slowdown by ramping up money manufacture (via lending, called “credit”) in the last two years, and it is going to end in tears despite being in part a command economy.

The country’s debt has increased just as quickly over the past two years as in the two years after the 2008 crunch. Its debt-to-GDP ratio has soared from 150% to nearly 260% over a decade, the kind of surge that is usually followed by a financial bust or an abrupt slowdown.

More money is not juicing the GDP like it used to, and repaying loans is getting harder:

Problem loans have doubled in two years and, officially, are already 5.5% of banks’ total lending. … China requires more and more credit to generate less and less growth: it now takes nearly four yuan of new borrowing to generate one yuan of additional GDP, up from just over one yuan of credit before the financial crisis. With the government’s connivance, debt levels can probably keep climbing for a while, perhaps even for a few more years. But not for ever.

China is now big and important:

China is the world’s second-biggest economy; its banking sector is the biggest, with assets equivalent to 40% of global GDP. Its stockmarkets, even after last year’s crash, are together worth $6 trillion, second only to America’s. And its bond market, at $7.5 trillion, is the world’s third-biggest and growing fast.

The Chinese government is interfering in markets, but it will only delay the inevitable:

In the past year alone, China has spent nearly $200 billion to prop up the stockmarket; $65 billion of bank loans have gone bad; financial frauds have cost investors at least $20 billion; and $600 billion of capital has left the country. To help pump up growth, officials have inflated a property bubble. Debt is still expanding twice as fast as the economy.