Will China's high debt levels spark a financial crisis?
William Yang (Taipei), 14.03.2018
Multiple international organizations have expressed concerns about China's ballooning debt levels and warned the Asian giant could face a full-blown financial crisis should there be no action to counter the problem.
Soaring debt levels and increasing complexity of the financial system have been a source of heightened concern among China watchers in recent months. A number of global bodies, like the International Monetary Fund (IMF), have warned the problems could lead to "financial distress" in the world's second-biggest economy if the government doesn't put in place remedial measures.
The IMF estimates China's overall debt figure to be about 234 percent of gross domestic product (GDP) and predicts it to rise to 300 percent by 2022. Corporate debt currently stands at around 165 percent of GDP, and household debt is also spiraling upward at a rapid pace.
Furthermore, systemic risks to the financial system have grown over the past several years due to the expanding role of the shadow-banking industry. As a result, China is seen as one of the economies most vulnerable to a banking crisis, although Beijing has repeatedly assured that the risks are under control.
In a bid to tighten their grip over the financial sector, Chinese policymakers have focused on strengthening oversight and regulation. In the latest move, the country's leadership handed the People's Bank of China (PBoC), the central bank, the authority to write rules for much of the financial sector.
China promises economic opening
Also, the China Banking Regulatory Commission and the China Insurance Regulatory Commission will be merged as part of an overhaul aimed at resolving existing problems such as unclear responsibilities and cross-regulation as well as closing regulatory loopholes and curbing risk in the $43 trillion (€34.78 trillion) banking and insurance industries. The moves place the PBoC at the heart of the new regulatory structure for finance in China.
Experts say it's too early to say how effective this new structure would be in tackling the country's debt problem while ensuring that economic growth doesn't decelerate.
Last week, Premier Li Keqiang announced a growth target of around 6.5 percent for this year, the same level that it handily beat in 2017 thanks in part to massive government infrastructure spending and record bank lending.
Analysts argue that fixed-asset investment, the biggest engine of China's economy, has long been a contributor to the growth of debt. "China has relied on export and debt-financed fixed asset investment for growth for over two decades," said Ho-Fung Hung, the Henry M. & Elizabeth P. Wiesenfeld Professor in political economy at the Johns Hopkins University.
"And as the central government and banking system keep producing new loans to absorb the debt, it leads to the continuous debt buildup," he told DW.
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