Debt Binge: China Did It Again

May 2, 2016 Updated: May 6, 2016

Let’s start with the facts: During the first quarter of 2016 and during a time when the Chinese economy stared into the abyss, the Chinese financial system created $712 billion in new loans. This is the highest amount of loans created on record, even higher than in 2009, right after the financial crisis.

Because China has one of the highest debt loads on the planet (346 percent of GDP according to Rabobank estimates—others estimate as low as 250 percent), analysts are sounding the alarm bells.

(Royal Bank of Scotland)
If China’s new loans were a whole economy, it would be bigger than Indonesia and the Netherlands. (Royal Bank of Scotland)

“China has engineered yet another credit boom to arrest the sharp drop in growth,” writes Marcus Wright of the Royal Bank of Scotland. What he means with “yet another” is the previous record build up in debt after the financial crisis which went almost exclusively into projects with little or no economic value. This is why the analyst calls the increase in debt a move “further away from what is desired.”

After all, even the Chinese regime admitted it needs to reduce investment spending, cut overcapacity, and rebalance the economy toward more consumer spending. So what about the record increase in debt in the first quarter? Not to worry, says Xinhua, the regime’s mouthpiece in an editorial published May 2.

“China will not resort to large stimulus measures; policymakers are more than aware of the consequences of such a short-sighted program,” it says, adding that “fears are unfounded” and that “this rapid increase in loans is temporary.”

The ramp up in debt is reminiscent of the financial crisis (Royal Bank of Scotland)
The ramp up in debt is reminiscent of the financial crisis (Royal Bank of Scotland)

Note that Xinhua speaks of stimulus in the future tense, as if the increase in debt wasn’t stimulus that already happened in the first quarter and as if banks were somehow independent of the central government. Because the central and local branches of government own most banks in China, almost any increase in debt is equivalent to official government stimulus, as Mark DeWeaver demonstrated in his book “Animal Spirits With Chinese Characteristics.

Christopher Balding, professor of economics at Peking University had this to say about the Xinhua editorial: “I think you guys already missed that off-ramp,” he commented on Twitter.

Further evidence he may be right and Xinhua may be wrong: the fiscal deficit. China usually runs deficits of about 1 percent, with notable exceptions during the financial crisis, when it approached 3 percent. This year, the regime is targeting a deficit of 3 percent or more, making it the highest in 34 years.  

(Royal Bank of Scotland)
(Royal Bank of Scotland)

Again, Xinhua thinks this will all be productive investment in the long term: “However, instead of being channeled to investment projects with short-term impact on GDP, as was the case back then, the lion’s share of the current new loans ended up funding long-term programs, supporting small businesses, and facilitating consumption, such as housing.”

We all know accurate statistics isn’t exactly China’s strong point, but counting housing as consumption is a novelty even the National Bureau of Statistics would have a bone to pick with.

Also not consumption is what Xinhua lists as “the start of numerous infrastructure projects,” and the systematic stockpiling of commodities.

Instead, the Royal Bank of Scotland thinks China has exactly the same problems as before and has abandoned the rebalancing objective to keep the economy from crashing.

“The economy remains beset by: an excessive reliance on investment driven growth; a structurally low share of GDP going to household incomes; overcapacity in key sectors; hidden non-performing loans in the banking sector [and] ad-hoc, reactive policy-making that fails to address the underlying distortions in the economy.”

Or in the words of famous psychologist Abraham Maslow: “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”