Financial crises are inextricably linked to excess debt. That is the old lesson a forgetful world had to painfully relearn in 2008.
Anybody who agrees with this cannot but wonder whether China is heading towards a financial blowout. New data released on Monday by the Bank for International Settlements shows that China’s debt is 248% of its gross domestic product. The steep increase since 2008 is mostly explained by the credit binge unleashed by Chinese banks, under pressure from the government, in a bid to keep the economy stable.
China could be a source of global financial instability given the size of its economy, the second biggest in the world. The option of inflating away these debts does not exist because producer prices have been falling for years now because of massive overcapacity. Every crisis is a black swan event—and hence fundamentally unpredictable. But the Chinese debt mountain is a clear source of worry.