China’s looming debt crisis is no cause for alarm, says PBOC expert
Joe Zhang says while some analysts cite China’s credit-to-GDP ratio as the main reason for an impending disaster, a number of economies with high ratios have defied the doomsday forecasts for decades
It is widely known that China has one of the highest credit-to-GDP ratios in the world at 205 per cent. To put that in perspective, the US’ gross domestic product is 60 per cent bigger than that of China, but China has a money supply balance that is 70 per cent larger than the US.
This fact is often cited as the definitive reason for a looming crisis in China and, thus, in the interdependent world. Until recently, I was in this alarmist camp, but I have started to question the logic.
READ MORE: China’s economy can avoid hard landing if government pushes market-driven reforms, says IMF chief
First, the rising ratio is a global phenomenon. And a credit crisis does not necessarily stop the ratio’s ascent. On the contrary, it often increases the ratio because of the subsequent monetary easing in the wake of a crisis. For example, Thailand, South Korea and Indonesia were the hardest hit in the 1997 Asian financial crisis. However, since then, the credit-to-GDP ratio in Thailand has gone from 85 per cent in 1996 to 127 per cent in 2014, and in Korea, from 37 per cent to 114 per cent. These are very sharp rises in 17 years. Only in Indonesia has the ratio slowly dropped, from 53 per cent to 40 per cent.
Second, the Asian financial crisis had nothing to do with ratios being too high. In fact, they were very low in the three countries. Instead, the crisis was a result of controlled (and thus overvalued) currencies and very high foreign debt. Likewise, the US subprime crisis had little to do with the credit-to-GDP ratio, and was a result of a massive amount of low-standard lending and financial derivatives on the basis of these subprime loans.
One can argue that the emergence of the huge amount of subprime loans reflected a lack of good lending opportunities, and that total credit was too big with regard to the economy. But the ratio itself (56 per cent in 2007) was neither the root cause of the crisis, nor even a symptom.