BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/04
Two factors underlie the explosion in Chinese indebtedness. First, it has long been cheap to borrow money in China, a situation created by the country’s earlier obsession with investment-driven growth. Even with deregulation of banks’ lending rates, there have been no big shifts in interest rates. Financing remains relatively inexpensive (for state enterprises, at least). The second factor is the massive stimulus programme implemented by the government during the 2008 financial crisis. Stimulus measures involved shoving loans out the doors of state banks to finance investment projects.
As lending has soared, the risk of funding unprofitable ventures has grown substantially. The stock of non-performing loans held by commercial banks, despite growth, remains fairly small, averaging less than 2 % of the overall loan stock. Many observers say the actual share is significantly larger. As the government moving to close excess production capacity in numerous industries, the volume of non-performing loans is expected to continue to rise.
Private sector domestic debt
Sources: Macrobond, PBoC and BOFIT.
China has considerably higher debt levels than most emerging economies, and the increase in indebtedness growth has been rapid since 2008. In many countries, similar booms in lending growth have resulted in financial sector crashes and sharp drops in economic growth. Compared to other countries, however, China has exceptionally large buffers. The state holds massive amounts of assets (e.g. state-owned enterprises), the reserve ratio requirement for banks is high and it still has huge currency reserves to protect the country from external risks.