Tackle credit bubble or let growth decelerate?

In the aftermath of the financial crisis, central banks around the world adopted an easy-money regime to prop up growth. China’s central bank, the People’s Bank of China (PBoC), was no exception. Not only did bank credit growth explode in a very short period, other avenues of credit creation also multiplied quickly. China’s overall stock of credit to gross domestic product (GDP) has crossed 200%.

That naturally raised concerns over the health of the banking sector. Surprisingly, the level of non-performing loans has remained low, at 1.1% of GDP last year, although it is widely believed that this figure does not reflect the true extent of bad debts because of restructuring.