The chart below from Credit Suisse shows the explosion of domestic credit growth in China after the financial crisis, which pushed the credit-to-GDP ratio to 171% of GDP. As it does not breakdown the debt by sector, I assume it is total credit, i.e. including all sectors.
It did not usually end well when a similar thing happened in the past in other countries. Whether it will “blow up” spectacularly, so to speak, is another matter of course, as the government can theoretically step in to cushion the impact. Whether the government will provide enough help at the right time is another matter, as we can now see a government which is quite reluctant to stimulate the economy.
Robert Prior-Wandesforde of Credit Suisse wrote:
It seems to us that the key question is not if the lending “bubble” deflates, but how it happens. Does it end up popping in dramatic fashion, sending the real economy into a tail-spin with potentially huge social and political consequences, or in a gradual, less disruptive fashion?
In our view, if the numbers shown in the chart were those of almost any other country than China, the chances of the first scenario coming to fruition would be extremely high. However, given that in China the State remains extremely influential and the policy authorities have both the willingness and, in our view, ability to bail out the banks as well as limit the damage to the real economy we believe the country is in a very different position to most.
