The growth in China has been largely sustained with debt. This is not all that unusual for emerging markets, but the levels in China are excessive by any measure.
Per the latest statistics, the debt level is now 251% of the nation’s GDP, or roughly 250% of the debt level in the US or even a long-struggling Europe. The leaders in China has been worrying about this debt level for years but, like most others, it has found no simple solution. If they take steps to close off access to the debt and engage in a massive austerity effort, the economy will stop growing. This presents the Chinese with a hard landing that could result in millions of lay-offs and the shuttering of thousands of companies. The government already finds it hard to contend with the demands of a 1.4 billion-strong population with growth that tracking between 7% and 9%. A sudden loss of credit availability drops that growth rate to perhaps as low as 3% -- that would be a crisis.
The Bank of China has tried to control debt with hikes in the interest rate, but this has had limited impact. The real challenge is that the hard-to-control shadow financial community remains very active. The foreign investor is also very active and continues to pour money into the country despite the fact that some form of implosion seems to many to be potentially unavoidable. There is increasing believe that China is close to where the US was in 2008
- Chris Kuehl, PhD, Armada Corporate Intelligence