Dawson, Jeff

Etra, Alex

Rosenblum, Aaron

Yale University

Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents (Series 1) Browse by Media Type 2-27-2017 China's Continuing Credit Boom Jeff Dawson Alex Etra Aaron Rosenblum Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation Dawson, Jeff; Etra, Alex; and Rosenblum, Aaron, "China's Continuing Credit Boom" (2017). YPFS Documents (Series 1). 14606. https://elischolar.library.yale.edu/ypfs-documents/14606 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents (Series 1) by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. 10/5/22, 12:35 PM China’s Continuing Credit Boom - Liberty Street Economicshttps://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom/ 1/8Liberty Street EconomicsFEBRUARY 27, 2017China’s Continuing Credit BoomJeff Dawson, Alex Etra, and Aaron RosenblumDebt in China has increased dramatically in recent years,accounting for roughly one-half of all new credit createdglobally since 2005. The country’s share of total global credit isnearly 25 percent, up from 5 percent ten years ago. By somemeasures (as documented below), China’s credit boom hasreached the point where countries typically encounter financialstress, which could spill over to international markets given thesize of the Chinese economy. To better understand theassociated risks, it is important to examine the drivers ofChina’s expansion in credit, the increasing complexity of itsfinancial system, and evidence that its supply of credit may begrowing more rapidly than reported. Note, however, that thereare several features of China’s financial system that reduce thethreat of a financial disruption.Nonfinancial debt in China has increased from roughly $3trillion at the end of 2005 to nearly $22 trillion, while bankingsystem assets have increased sixfold over the same period toover 300 percent of GDP. In 2016 alone, credit outstandingincreased by more than $3 trillion, with the pace of growth stillroughly twice that of nominal GDP. As a result, the “credit-to-GDP gap”—the difference between the debt-to-GDP ratio andits long-run trend—has reached almost 30 percentage points.The international experience suggests that such a rapid buildupis often followed by stress in domestic banking systems.10/5/22, 12:35 PM China’s Continuing Credit Boom - Liberty Street Economicshttps://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom/ 2/8Roughly one-third of boom cases end up in financial crises andanother third precede extended periods of below-trendeconomic growth.Drivers of China’s Credit GrowthAs seen in the chart below, rising nonfinancial sector debt wasdriven initially by a surge in corporate borrowing in response tothe global financial crisis. This additional debt was comprisedmostly of medium- and long-term corporate loans related toinfrastructure and property projects.The chart below shows that while bank lending is the largestcomponent of China’s credit boom, nontraditional or “shadow”credit has also grown rapidly. Nonbanks, often in cooperationwith banks, have found ways around authorities’ efforts torestrict lending to certain sectors (such as real estate andindustries with excess capacity like steel and cement) followingthe initial surge in credit in 2009. This shadow credit (in theform of trust loans, entrusted lending, and undiscountedbankers’ acceptances) is included in official data and accountsfor about 15 percent of total credit—31 percent of GDP—compared with 5 percent ten years ago. Authorities have slowedthe growth in reported shadow lending since 2013 throughmacroprudential measures, although this may have causedcredit to migrate to other lending channels.More recently, rapid mortgage lending has been a key driver ofcredit growth, with residential mortgage loans increasing by 35percent year over year at the end of December 2016. Mortgagesaccount for roughly 18 percent of bank loans in China(compared to 30 percent in South Korea, 23 percent in Japan,and 25 percent in the United States). The pace of mortgagelending appears likely to slow going forward as Chineseauthorities tighten macroprudential policy on property-relatedlending.10/5/22, 12:35 PM China’s Continuing Credit Boom - Liberty Street Economicshttps://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom/ 3/8The increasing complexity of China’s financial system has madeit difficult to estimate the true level and growth rate of credit.Official data put nonfinancial debt at roughly 205 percent ofGDP. However, adjustments for additional sources of credit notfully captured in the official data suggest total credit could behigher. As shown in the chart below, the pace of total creditgrowth is higher when swaps of local government-related bankloans for municipal bonds are included. China’s credit measureexcludes swapped bank loans but does not add back themunicipal bonds they were exchanged for.Smaller Banks Increasingly Reliant on Nondeposit BorrowingChinese banks have become global behemoths. The country ishome to four of the five largest banks in the world by asset size.Yet, China’s credit expansion has been driven by relatively smallbanks, which have been growing their total assets at two tothree times the pace of the largest commercial banks.Joint stock commercial banks (JSBs), city commercial banks(CCBs), and other smaller-scale institutions have increasinglyused less stable funding sources to finance their balance sheetexpansion, primarily by tapping the interbank market andissuing wealth management products (WMP), as seen in thechart below. WMPs are predominantly short-term investmentproducts sold by banks and nonbank financial institutions thatprovide investors with higher rates of return than bank depositrates. WMPs can have a range of underlying assets, includingbonds, money market funds, and even a limited amount of bankloans. Official data on banks’ WMPs show an almost sixfoldincrease since 2011, to the equivalent of about $4 trillion or 37percent of GDP. The growing reliance of Chinese banks on thistype of funding has increased concerns over potential shocks tomarket-based funding, a risk highlighted by the InternationalMonetary Fund in its October 2016 Global Financial StabilityReport.10/5/22, 12:35 PM China’s Continuing Credit Boom - Liberty Street Economicshttps://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom/ 4/8Credit Offers Less Boost to GrowthAn interesting development is that credit appears to beproviding less of a boost to Chinese GDP growth than it used to.As shown in the chart below, the credit impulse—the change inthe flow of new credit as a percentage of GDP—appears to beproviding less bang to output for each additional yuan of credit,underscoring questions over how much lending is going tounproductive “zombie” companies. Improving credit efficiencygoing forward will require reforms, such as hardening budgetconstraints at state-owned enterprises and local governments,reducing implicit and explicit guarantees in the financialsystem, and slowing aggressive balance sheet growth at smallerfinancial institutions.10/5/22, 12:35 PM China’s Continuing Credit Boom - Liberty Street Economicshttps://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom/ 5/8Features That Reduce the Risk of a Financial DisruptionDespite its vulnerabilities, China’s financial system has severalfeatures that reduce the associated risks.Unlike many emerging-market credit boomsthat have ended in busts, China’s credit growthhas been funded primarily by high domesticsaving, of which bank deposits are the vastmajority.Chinese authorities have ample liquidity tools,including high required reserve ratios, theability to extend short-term liquidity via anarray of facilities, and a financial sectordominated by state-owned lenders andborrowers.By some measures, the Chinese financialsystem has a smaller nonbank segment than itscounterparts in advanced economies do.China has substantial fiscal resources toaddress losses in its financial system andamong troubled state-owned debtors.According to IMF projections, China’s totalgovernment gross debt (including off-balance-sheet borrowing implicitly guaranteed by thestate) was around 60 percent of GDP at the endof 2016—lower than the level seen in most10/5/22, 12:35 PM China’s Continuing Credit Boom - Liberty Street Economicshttps://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom/ 6/8 SEARCH[][]advanced economies. The government’s balancesheet is further bolstered by sizeable, albeitdeclining, foreign exchange reserves.This last consideration is very important; the Chinesegovernment’s strong balance sheet should give it sufficientcapacity to absorb potential losses from a financial disruption.Still, the speed and increasing complexity of the country’s creditgrowth suggest that there could be significant benefits for Chinain addressing its banking system and financial reforms.DisclaimerThe views expressed in this post are those of the authors and donot necessarily reflect the position of the Federal Reserve Bankof New York or the Federal Reserve System. Any errors oromissions are the responsibility of the authors.[]Jeff Dawson is an officer in the Federal ReserveBank of New York’s Research and Statistics Group.Alex Etra is an associate in the Bank’s ExecutiveOffice. Aaron Rosenblum is a senior analyst in theBank’s Research and Statistics Group. How to cite this blog post: Jeff Dawson, Alex Etra, and Aaron Rosenblum, “China’s Continuing Credit Boom,”Federal Reserve Bank of New York Liberty Street Economics (blog), February 27, 2017,http://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom.html.The comments to this entry are closed.10/5/22, 12:35 PM China’s Continuing Credit Boom - Liberty Street Economicshttps://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom/ 7/8enter your email SUBMIT RSS Feed Follow Liberty Street EconomicsRECEIVE EMAIL ALERTS FOR THIS PAGEAbout the BlogLiberty Street Economics features insight and analysis from New York Fedeconomists working at the intersection of research and policy. Launched in 2011,the blog takes its name from the Bank’s headquarters at 33 Liberty Street inManhattan’s Financial District.The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and AsaniSarkar, all economists in the Bank’s Research Group.Liberty Street Economics does not publish new posts during the blackout periodssurrounding Federal Open Market Committee meetings.The views expressed are those of the authors, and do not necessarily re ect theposition of the New York Fed or the Federal Reserve System.Economic Research TrackerLiberty Street Economics is now available on the iPhone® andiPad® and can be customized by economic research topic oreconomist.Economic InequalityThis ongoing Liberty Street Economics series analyzes disparities in economic andpolicy outcomes by race, gender, age, region, income, and other factors.  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China\u27s Continuing Credit Boom

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China\u27s Continuing Credit Boom

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