By John Richardson
There are three things you need to bear in mind about credit creation in China, which according to the government’s own data, are as follows:
- In 2007, $1 of additional credit added 83 cents to GDP.
- By 2013, $1 was only adding 17 cents.
- This year, each additional dollar of lending will only add 10 cents to growth.
China’s leaders could, of course, decide to kick the can further down the road through unleashing another explosion in credit. This might eke out another year or so of stellar growth.
But time to make use of the investment-driven growth model will obviously soon run out, given that, by the government’s own admission, we cannot be that far away from the point where each dollar of debt ends up subtracting from, rather than adding to, GDP.
We therefore agree with Michael Pettis, the Peking University professor of finance, when he writes: “Beijing can manage a rapidly declining pace of credit creation, which must inevitably result in much slower although healthier GDP growth.
“Or Beijing can allow enough credit growth to prevent a further slowdown but, once the perpetual rolling-over of bad loans absorbs most of the country’s loan creation capacity, it will lose control of growth altogether and growth will collapse.
“The choice, in other words, is not between hard landing and soft landing.
“China will either choose a ‘long landing’, in which growth rates drop sharply but in a controlled way such that unemployment remains reasonable even as GDP growth drops to 3% or less, or it will choose what analysts will at first hail as a soft landing – a few years of continued growth of 6-7% – followed by a collapse in growth and soaring unemployment.”