China’s central bank may be approaching a “crisis”, the Bank for International Settlements warns. Ambrose Evans-Pritchard at The Telegraph has the story:
A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late.
The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.
Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences.
This is hardly the first time economists and investors have raised the alarm about China’s growing debt pile, but it’s nevertheless an alarming piece of analysis. The report estimates that China’s debt stood at 255 percent of GDP at the end of last year. And given that China has continued to borrow to prop up its shaky economy, that figure is almost certainly even higher today.
It is a huge amount of debt, but it’s not unprecedented. Niall Ferguson estimates in The Cash Nexus that Britain’s debt-to-GDP ratio reached 268 percent in 1822. As students of history know, the sun didn’t set on the British Empire for over one hundred years after that. Indeed, as Walter Russell Mead explains in God and Gold, the ability to maintain so much debt helped Britain defeat its European challengers (Spain and France, primarily) and grow its empire.
The British sustained high levels of debt by being exceptionally good and (for the time) highly sophisticated bankers. But they also taxed their citizens far more than, say, the French did. France struggled under a much smaller debt load for nearly two centuries because it wasn’t able to squeeze its citizens as much as London could.
China will likely have to find a different formula to finance its way through the hard times ahead. Britain survived because its citizens continued to have faith that their government would pay them back, and so British debt became a valuable asset. It’s not clear that things are the same in China:
China’s problem is internal credit. The risk is that a fresh spate of capital outflows will force the central bank to sell foreign exchange reserves to defend the yuan, automatically tightening monetary policy. In extremis, this could feed a vicious circle as credit woes set off further outflows.
The Chinese banking system is an arm of the Communist Party so any denouement will probably take the form of perpetual roll-overs,
sapping the vitality of economy gradually.
Indeed, the people who seem most worried about China are Chinese citizens who do whatever they can to get money out of the country. At the end of the day, that the people who know China best seem so on edge is what makes us worried about the health of the Middle Kingdom.
Editor’s Note: A previous version of this post compared China’s total debt-to-GDP ratio to the U.S. public debt-to-GDP ratio. We have deleted this misleading data point.