Exclusively from Michael Pettis newsletter:
We are used to thinking of sovereign crises as occurring mainly when a country, excessively dependent on external borrowing to generate economic activity, is suddenly cut off by a sudden stop in foreign lending. For most of us this “sudden stop” is what is meant by reaching debt capacity limits. Because China’s external debt is relatively low compared to its reserves (but growing very quickly), this usually means for most of us that China does not face meaningful debt constraints.
In fact however most sovereign debt crises in modern history have been caused by excessive domestic debt, and not external debt. In some countries a domestically-financed sudden stop can occur, but given the control that Beijing has over the banking system – which directly or indirectly comprises nearly the whole financial system – and given the high credibility Beijing enjoys as guarantor of the banking system, I do not think we are likely to see a sudden stop (although clearly this isn’t impossible). So what kinds of constraints do Chinese borrowers face – can’t they borrow forever?
