Over-investment has knocked down returns on investments, and it becomes apparent when growth has slowed only to 7.6%. The consequence of that is that there is a little debt problem in China. The volume of debt is getting bigger, while the ability to service the debt is diminishing.
The latest major surge in investment happened after the 2008/09 financial crisis, and it was fuelled by credit. The government announced RMB4 trillion stimulus plan, and asked banks to lend as much as possible, that was how that happened. Later, the shadow banking system grew very rapidly, particularly after PBOC tighten policy to fight inflation. For a long time, we believe that there are more debts in the economythan anyone could have known. The trouble is that massive amount of debts which were used to finance a lot of the projects are not generating enough return on over-investment, as it has becoming rather apparent now. In order to sustain that, however, one of the ways is, ironically, to lend even more money to these enterprises.
The latest major surge in investment happened after the 2008/09 financial crisis, and it was fuelled by credit. The government announced RMB4 trillion stimulus plan, and asked banks to lend as much as possible, that was how that happened. Later, the shadow banking system grew very rapidly, particularly after PBOC tighten policy to fight inflation. For a long time, we believe that there are more debts in the economythan anyone could have known. The trouble is that massive amount of debts which were used to finance a lot of the projects are not generating enough return on over-investment, as it has becoming rather apparent now. In order to sustain that, however, one of the ways is, ironically, to lend even more money to these enterprises.
The chart below clearly shows the very dramatic
increase in credit after the 2008/09 financial crisis, and associated
with it is the remarkable increase of the growth rate of money supply.
With over-investment crushing returns already happening, there is little
doubt to our mind that a lot of debts are going to be bad.
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