We have expressed doubts about China’s economy on several occasions in the past. See: ‘Can China’s Planners Do It One More Time‘ and ‘Soft Versus Hard Landing‘, where we have discussed a number of early warning signs in detail. Of course we need not really rely on the specific data describing economic history to be able to forecast within praxeological constraints that China’s economy will be in trouble: the knowledge that the country has experienced two enormous credit booms in close succession suffices to allow us to come to this conclusion. The only things that introduce an element of uncertainty are the question of timing and in China’s case specifically, the ability of the central economic planners to order the banks around.
To this point we must introduce a qualification: state control over the banking system is very extensive, so that the unwillingness of bankers to take on more risk in the face of faltering boom is certainly not a factor in restricting credit. However, one must be aware that in every bust, what is indeed a factor in restricting credit regardless of the powers of regulators and planners is the state of the pool of real savings.
China: bank credit as a percentage of GDP (source: Morgan Stanley). Since December of 2008, $5.3 trillion in additional loans have been disbursed. Relative to GDP, this is the functional equivalent of the US banking system extending about $11.2 trillion in new loans. If that had actually happened in the US, we’d have witnessed a crack-up boom that would have everybody greatly worried by now - click chart for better resolution.
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