How long will it last?

Is China's Bubble the Next Financial Crisis?

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
Read More.
( Updated
)
a | A

Will China be the source of the next global financial disaster? The evidence increasingly offers reason for concern, though the nature of any calamity could be very different from what the world endured in 2008.

At a time when consumers and governments in the U.S. and Europe have been trying -- with limited success -- to pare down or at least stabilize their debt burdens, China has been doing the opposite. Over the past five years, it has pumped more than $13 trillion of credit into its economy, in an effort to keep its growth rate up amid a weak global recovery.

The Chinese credit boom has rapidly turned the country into one of the developing world's most indebted, according to a new report from London's Centre for Economic Policy Research. As of 2013, total private and government debt, excluding that of financial institutions, stood at 217 percent of gross domestic product, up from only 147 percent in 2008.

That's more than in any major developing nation other than Hungary, though still significantly less than in advanced nations such as the U.S. or Japan.

Such credit-fueled growth can't be sustained for long without causing major distortions and setting the country up for a fall. The stimulus is already running into diminishing returns. Over the five years through 2013, government and private debt grew by about 3 yuan for each added yuan of economic activity, a level of credit intensity that the U.S. exceeded only in the years leading up to the 2008 crisis. As in the U.S., much of the money is going to borrowers with questionable ability to pay, fueling overbuilding and excess capacity.

So what happens when the easy money stops and billions or trillions of dollars in loans go bad? The CEPR report notes that almost all the debt is so far held within China, so the paths of contagion would probably be different than those of the U.S. subprime crisis, which resulted in direct losses for banks around the world. More likely is a sort of creeping malaise similar to Japan's lost decades, in which growth stalls as the government turns from pushing credit to mopping up the mess. The outlook could change for the worse, though, if the credit boom keeps going at the current pace.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net