China is the world’s second largest economy, and is seemingly following in the footsteps of the only country above them, The United States of America. The Chinese manufacturing industry’s growth has plateaued and now the Communist nation is relying on debt to fuel their economy. As The Great Recession and financial crisis of 2008 have proven that enticing people to buy more expensive products on credit is a dangerous tactic.
At the beginning of every calendar year, lending in China always seems to rise due to government run banks having their quotas raised. This year was significant however due to the magnitude and duration in which lending rose. In January, new loans in China rose to a record breaking level of 2.51 trillion Yuan, and this seasonal bump comes following months of sustained loan increases. In the short-term, this growth by debt strategy will aid China’s economy, but as time passes and the loan rate continues to rise, the risk of borrowers defaulting on their loans quickly becomes a very serious threat.
There is a pair of concerns regarding China’s growing stockpile of debt, both of which are exacerbated by China’s history of not reporting 100% accurate statistics. The first worry is simply how quickly China’s lending rate is rising. In the span of one year, from December 2014 to December 2015, non-performing or bad loans rose at a rate over 50%. Jim Chanos, president of Kynikos Associates hedge fund and established investor in China, spoke on the rate at which the debt is rising saying, “The debt is still growing two to three ‘X’ the economy every year…”.
The second major concern is how prepared China’s commercial banks are for a rising default rate. Commercial banks in the United States were devastated in 2008 by the massive wave of defaults, leading to the federal government having to bailout those banks deemed large enough to have their failure cause further economic problems. Informed analysts continue to predict that the Chinese government would act in a similar manner on behalf of the banks, but lawyer and authoer Gordan Chang is not as optimistic, “Nobody knows how bad and how weak Chinese banks are because no one knows the quality of the loan books…”.
Beijing still has sizeable cash stowed away and Chinese government debt is relatively low at roughly 43% of the nations GDP. However, in 2014 a small company dealing with solar power was the first Chinese company to be allowed to miss a payment on their debt. Defaults since that point have been both rare and minor, but Beijing has been slowly weakening the assurances that serve as the foundation of China’s entire financial structure. Globally, an increasing number of banks around the world have been adding to their reserves but due to their less than transparent policies, it is not known if China has been accumulating enough cash to prevent a nation wide financial crisis.