Borrowing Binge

                China's debt is worrying investors around the world. According to The  Economist, "China is on a borrowing binge". Since 2008 China's debt has exponentially increased from 100% of GDP to a current high of 250% of GDP. This is a staggering and worrying number because this is a Debt/GDP level that would be exhibited by wealthy nations, not emerging markets such as China. Most investors are worried because history tends to repeat itself, and a massive increase in borrowing, which is a result of China's huge debt increase, usually precedes a financial crash. This trend was exhibited by Japan, South Korea, and other emerging markets in the 90's and America and Britain in 2008. What is also concerning that bolsters the belief of an economic crash is that nominal growth has been continually declining from 15% a year in the 2000's to 8.5% a year now. This is also accompanied by a consistently decreasing inflation of 1.6%. This decrease in nominal growth makes it harder for debtors to pay their bills and thus makes a debt crisis seem inevitable.

           Lucky for the world economy, China controls its banks, and thus it can bail them out to avoid economic crisis. So, the biggest problem isn't actually the debt, but instead complacency. This is because half of China's debt is owed by companies, and in turn state owned enterprises and property developers. What China needs to do is have its officials do a better job of cleaning up the financial system. As the economy begins to slow as a result of this overwhelming debt, and housing markets fail just like in the U.S. in 2008, a good portion of these loans will prove unable to be paid.  However, even if loans begin to be unpaid, since China has such a unique regime it will be fine. This is because most of the banks are state owned and similarly most of the companies are owned by states or the government. Thus if China starts to face an economic credit crisis it will just have banks lend more and lucky for China it has an enormous amount of foreign-exchange reserves which would also save it. Since China has so many economic cushions, or at least more than other economies did in the past, it has plenty of time to tackle its debt crisis. Now the only problem that remains is how efficiently will it do so.

From the October 18th-24th edition of "The Economist"