Haibin Zhu, J.P. Morgan chief China economist, said that China’s debt is a “key source of vulnerability,” even though much of it is domestic and owned by the country’s public sector.
“Given the size of the economy and of the debt burden, and the extensive cross-border financial connections, a disruptive debt event in China could quickly spread to other parts of the globe,” Zhu said in a research report. “That is, China could well be the epicentre of the next crisis.”
China accounted for 43 per cent of the increase in worldwide debt since 2007, with global debt standing at US$164 trillion in 2016, according to the International Monetary Fund.
Its ratio of credit to the non-financial sector as a percentage of gross domestic product, an important measure of debt levels, stood at 208.7 per cent at the end of last year, up from 115.6 per cent at the end of 2007, according to the Bank of International Settlements.
By comparison, the credit-to-GDP ratio for the United States was 152.2 per cent and 159.7 per cent in the euro zone at the end of last year, according to BIS.
Much of that growth has come in the form of “shadow banking,” or lending by entities other than banks, since the financial crisis. These range from large trust companies to peer-to-peer lenders and micro-financing firms.
China's investment in infrastructure fell 6% y/y in August: weakest since 2011, when the economy was coming off its stimulus high. Clear sign of how efforts to control debt are starting to hit real activity. pic.twitter.com/lTO0aHLlQd
— Simon Rabinovitch (@S_Rabinovitch) September 14, 2018
The popular view is that China will give up and reflate the economy, as it's done in the past. Maybe. But so far analysts like @hzsong are, I think, winning the debate: China is easing at the margins but still trying to restrain leverage. Credit growth remains relatively weak. pic.twitter.com/jYIfzSJpn1
— Simon Rabinovitch (@S_Rabinovitch) September 14, 2018