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Opinion
Christopher Balding

China's Credit Conundrum

A flood of new financing is deepening the chances of a crisis.
Promised cuts won't do much to ease overcapacity in the steel sector.

Promised cuts won't do much to ease overcapacity in the steel sector.

Source: ChinaFotoPress/Getty Images

China has two very good reasons to slow the gusher of cheap money that continues to flood its economy. The first, obviously, is to prevent the kind of financial implosion that's struck down similarly debt-burdened countries. The second is just as important: to clear out the deadwood in the world's second-largest economy.

For Chinese leaders, the need to prop up faltering GDP growth outweighs fears about a rapid buildup in debt. In January alone, banks made a record $385 billion worth of new loans, more than 70 percent higher than the year before. Debt now tops 230 percent of GDP and could reach as high as 300 percent of GDP if current trends continue. Billionaire investor Bill Gross has joined the chorus of voices calling this trajectory "unsustainable." Even the Bank for International Settlements, a body not known for hyperbole, has warned that Chinese debt is reaching levels that typically trigger financial crises.