China is building its future on credit

As China tries to overcome slowdowns in its industrial and trade sectors, the country’s banks have continued to increase the pace of lending, issuing 1.38 trillion yuan ($205.8 billion) worth of loans in June. The figure confirms some economists’ expectations that lending will keep rising as China’s central government attempts to revive economic growth and boost property markets that showed signs of another slump in May. It also indicates that despite Beijing’s repeated pledges to reduce the economy’s reliance on credit and state-led investment, the easy flow of financing from state-owned banks remains the country’s primary bulwark against widespread debt crises among corporations and local governments.

The June credit figure, according to official data released July 15, followed a sharp hike in formal bank lending between April and May, suggesting that recent government efforts to increase the state-owned banking sector’s share of nationwide financing are on course. It is difficult to overstate the scale and intensity of the transformation undergone by China’s financial system since the 2008 global financial crisis, which compelled the Chinese government to embark on what now looks likely to become a decade long (or longer) stimulus drive. In 2007, state banks issued 3.6 trillion yuan worth of new loans. Their lending has since increased each year, reaching 11 trillion yuan in 2015. Meanwhile, total social financing — encompassing state-controlled and informal loans — ballooned to 15.9 trillion yuan last year. Outstanding local government debts remain at manageable levels, but corporate debt, much of which does not enjoy the state’s backing against default, equals more than 175 percent of China’s national economic output. Officially, only 1.75 percent of total outstanding loans are considered nonperforming, or likely to be defaulted on. Most independent analysts, however, expect the genuine nonperforming loan rate to be much higher.