China Shuffles Its Debt Around

Rhetorically, China certainly seems serious about deleveraging. Everyone from President Xi Jinping to the People's Bank of China to the Public Security Ministry has lately warned about controlling financial risks and promoting stability. Officials are even resorting to exotic zoological analogies -- invoking the mythical gray rhino -- to describe the looming threats.

In reality, though, there's been no deleveraging to speak of. New total social financing grew by 14.5 percent in the first half of 2017, up from 10.8 percent in the same period last year and rising roughly 3 percent faster than nominal gross domestic product. It's true that measures such as credit intensity and the stock of total social financing to GDP have flattened or declined somewhat. But this was due to a temporary surge in commodity prices, now receding quickly.

China isn't so much deleveraging as changing who borrows. Loans to non-financial corporations, for instance, have in fact been scaled back: They're up a relatively modest 8 percent. But total loans to households are up 24 percent. "Portfolio investment" -- code for bank holdings of wealth-management products -- is up 18 percent. Combined, household debt and portfolio investment are now 13 percent larger than non-financial corporate debt, and growing by 20 percent on an annual basis. These aren't small numbers.