Advertisement
A Lehman Brothers-style meltdown in the Chinese banking system remains very unlikely. Photo: AP

The international community of China-watchers is suffering one of its periodic flaps. China’s debt levels, we are told, are spiralling out of control, and the country is speeding towards its very own version of the Lehman crisis of 2008, except on an even bigger scale.

Advertisement

Several things have come together to feed this latest flap. Last week, the Bank for International Settlements, often called “the central bankers’ central bank”, flashed a red light over something called China’s credit-to-GDP gap, which it said had widened to more than three times the level normally considered dangerous.

Coming on top of China’s annual health check from the International Monetary Fund, which last month emphasised the “the urgency of addressing the corporate debt problem”, the BIS warning revived fears about an impending financial crisis in the world’s second largest economy. A research report from brokerage house CLSA fed those fears further, estimating that bad debts in China’s shadow banking system now exceed 4 trillion yuan.

The Guangxi Nonferrous Metals Group became China’s first interbank bond issuer to fail. Photo: Bloomberg
The Guangxi Nonferrous Metals Group became China’s first interbank bond issuer to fail. Photo: Bloomberg
Then, on Wednesday, news broke that state-owned Guangxi Nonferrous Metals had become the first ever issuer in China’s interbank bond market to be forced into liquidation, after repeatedly defaulting on its debt. To confirmed China bears, this last piece of news was the most significant: proof, they argued, that China’s state-controlled banks are now so fragile that they can no longer protect their own. To them, the bankruptcy was just the tip of an iceberg, and a full-scale financial meltdown can’t be far behind.
Advertisement

Happily, the grizzliest of these bears are wrong. Yes, there are reasons to be worried about China’s debt build-up, but the risk of a 2008-style crisis is not one of them. It is true that at close to 250 per cent of GDP, China’s non-financial sector debt is approaching the levels at which crises struck in Japan at the end of the 1980s and in other economies since. Even more troubling is the speed at which the debt pile has accumulated, with outstanding debt currently growing at around twice the pace of nominal GDP. Such rapid growth, fret the bears, means credit standards must have been lax and much of the capital must have been allocated poorly. With economic growth now slowing, more and more borrowers will inevitably default, they argue.

Advertisement